Eat the capital gains and do some flips? or 1031? Need some feedback, pros and cons.

[Mat Lewczenko]

I'm receiving a contract on my multifamily (6unit) that we have had now for 10 months. It was a dump, fixed it up and now it is 100% occupied, stable and cash-flowing. My cashflow after all expenses, debt service and capital reserves is about $700/mo.

I currently stand to make about $60k on the deal - with $40k taxable above my basis in the property. So my I'm reaching out to BP for some pros and cons of either eating the tax and using those funds to flip a couple properties, or 1031 the funds into another deal.

Thanks in advance for the feedback.

[Bill Gulley]

Chances are you'll be paying the tax bill someday. I've done 1031s but probably shouldn't have, it was a popular thought.

The though of deferring taxes and paying with future cheaper dollars is rather a myth, for those dollars to be cheaper you will have inflation. With inflation comes appreciation, the tax bite 10 or 20 years later can be just as bad.

Taking the hit now provides unencumber capital, equity remaining in the walls of the next project is still encumbered, do a cash out refi and see your tax guy. Allow a partner in and see your tax guy. Have a casualty loss totaling the place, see your tax guy. Do an installment deal, see your tax guy. Pledge or cross collateralize that property, you may need to see your tax guy.

Add the cost of the intermediary and closings and that's another matter to examine.

Look to your current tax rate and your expected rate down the road and hope the rates don't change.

I'd say many who do 1031s do so for bragging rights rather than really any prudent financial planning. It can be used as a tool to employ by advisors as a justification for charging a client, making it appear they obtained some great financial plan or a tax deferred transaction as a benefit.

All, IMO. :)