To 1031 or Not to 1031, That is the Question

[David Harriman]

I had good timing and got a good deal on a rental property I purchased in the Denver area about 2.5 years ago. I bought it for $238k, put 20% down. Rents are up to $1850/month in the area, but the home value is up to about $375k for the property. The way I look at it is, I wouldn't buy a home for $375k that I could only rent for $1850, so why continue owning it if money can be better used elsewhere? I know it's impossible to time the market, and the Denver area may have plenty more room for growth, but I'm more interested in the cash-flow game than riding the appreciation wave. Having said that, I'm torn between which route makes the most sense: Do I 1031 to save on tax, or do I pay the taxman on appreciation, but keep flexibility with what I can do with the cash?

The downside I see with 1031ing is that it forces me to get into a relatively move-in ready property since I can't roll my equity into rehab.

The upside for paying gains on my equity is that I have the flexibility to sit on the cash indefinitely while looking for a sweet deal, and could buy something that's needing some love, and have the cash to make it happen.

A little about me and my goals:

-My risk tolerance is about 5 or 6 out of 10.

-I'm primarily interested in building a portfolio of cash flowing rentals (open to multi-family or SFR). I'm more interested in the potential for cash flow than I am for appreciation (though both would be great!).

-I'd like to have 10 to 15 doors 10 years from now.

-I am self-employed and have a fairly flexible schedule.

-I'm open to having to hire out moderate rehab on a property I purchase if the numbers make sense.

-I'm most likely going to be buying in either CO Springs, or Omaha.

I'm new to this site, and appreciate your feedback. Thanks in advance!  

[Matt M.]

Being self-employed, are you sure you can qualify for a loan on a new purchase? I would assume yes, but if there is some issue, then you don't want to be caught in a contract to sell. What do you like about the Springs or Omaha? Do you have people there you trust?

I'd 1031 if you are comfortable where you will end up. However, I would caution you about selling the property before you have something to buy. Once you close on your home, you'll have 45 days to "identify" up to 3 new properties. You'll have to buy one of those. If you don't, then your 1031 is dead. 

You might wait to see if Trump reduces the cap gains tax as well. Another year of appreciation can't hurt.