1031 to SFH or turnkey property

[Jessica Singh]

I want to save ~80K capital gains but not knowledgeable about investing thus seeking help/advice. PlanA: I am thinking of buying a home where I rent and move into it after 2 years. The only problem is where I live homes are 700K, and my 1031 fund is 500K. I will be cash flow negative ($100/month) for the 2 years that I will be renting. Not sure if I need to find investments that give 15% interest (for now and figure out another 1031 when life is little settled).  Ideally, I wish to park funds for 2-3 years before I want to think about plan A again. Or I should be implementing plan A now. Any ideas appreciated.

[Dave Foster]

@Jessica Singh, Sorry to say it, but just about any investment that is 1031 compliant, low risk  and delivers 15% is just about, well... almost non-existent.  I think the real question right now is - are your 80K of gains severely at market risk if you don't sell now?  I'd compare the risk of your current asset losing value with the possibility of the area where you want to live dropping in value.  

If it's more likely that the area you want to go to will have a correction then I'd wait to sell your current place until you think prices have dropped enough to be attractive for you to buy.  But if it's more likely that your current property will have a correction and you'll lose some of that $80K then its' time to sell and 1031 into the new area now.

The reason I say that is that your goals are not strictly investment maximization.  You''re wanting to convert investment gain into a primary residence.  That's a great plan but it's more of a lifestyle decision.  And quantifying that decision with strictly investment parameters isn't going to give you the whole picture.

For instance,(forget the 1031 for a minute)  If you found the perfect house to buy right now and your desired price point was $700,000 but you would have to pay $702,400 for it now would you?  That's the real impact of doing the 1031 now and being $100 short/month.  If that's the perfect house or the perfect area and the only thing you're worried about is being $100/month short I'd break my own arm trying to sign the listing agreement faster.

On the other side what if you feel that your $80K of profit is at risk.  What if your $500K house drops1/2 of 1%.  That would mean that you would be selling it for $497,500.  That's equal to your shortfall of two years in the new property.  And trust me, if the market corrects it will be by a whole heap more than 1/2 of 1%.

Since your goals are lifestyle and not investment exclusive I wouldn't let a $100/month shortfall keep me up at night if I knew where I wanted to buy and felt that prices were fair.  1031 and get the clock ticking on what will become your next primary residence in a couple of years.