Advice for selling and reinvesting later

[Matt Smith]

Hi all, I need some advice from any members that might have experience in this subject matter. I have been planning to get started in REI for several months now but a recent job relocation has put this on hold. I wasn't sure what area to post this in.

What I need advice on is the sale of my current home and then what to do when I return from the assignment. I have been in my current home for a little over 8 years. I will be moving from Pell City, AL (40 miles east of Birmingham) to the Columbus, OH area. My plan is to sell my house in the early May time frame. I hope to make about $40-$50K on the sale. I will be renting for 2 years in Ohio and then I will move back to Alabama. 

My questions are:

1) What would be the best thing to do with my equity while on assignment (I will also be adding $2-$3k per month to the total for the two years). 

2) About 18 months into the assignment, I will be looking for properties on the lake back in Alabama. I want to find a fixer upper for ~$250- $300k and have an "All in Budget" of about $450k. What is my best avenue to look for these fixer uppers? I'll be in Ohio while looking for the properties and hopefully I'll be starting the renovations prior to moving back. 

3) Is this type of transaction where the 1031 can be used? If so, how would I do it?

I probably have many more questions as I get into this transition but these are the ones I'd like to start with. 

If anyone is a real estate agent in the Dublin/ Powell area near Columbus, I'd love to make contact and understand what the rental market looks like there. We went up last weekend to check out the neighborhoods but we'll need to find a rental by early to mid June as we'll be moving up by July 10th. 

Any help/ advice would be greatly appreciated. 

Thanks.

Matt

[Clayton Mobley]

@Matt Smith Of course, @Dave Foster is always the expert on 1031s, but I would point out another hiccup for you, which is that your current property isn't an investment property. 1031 exchanges are only for exchanging like-kind investment properties, so you could not sell your current residence and exchange it for a fixer upper. It also sounds (forgive me if I'm wrong) like the fixer upper you'd be looking for in AL would be as a home as well, for when you move back from OH after your assignment. From what I understand of your situation a 1031 is a no-go on every front: your current prop is your primary residence, you're not looking to purchase a new prop for a while (1031s exchange properties concurrently, you can't sell one and then buy the new one a year later), and your new prop would also be a residence.

However, the bonus of your current prop being your primary residence is that you'll likely pay no taxes on the sale since you've lived there for more than two years. Under Sec 121 you can exclude up to $250k (or $500k if you're married) of capital gain from the sale of a primary residence, so your expected profit should be well under that limit. 

With regard to what to do with that capital, the only wrong answer is nothing. That's a decent chunk of change, so you should definitely put it to work. How is sort of a matter of what your priorities are. Are you just looking for a set-it-and-forget it investment or are you willing to do a bit more leg work for potentially higher returns? One of the simplest answers is to put in an indexed ETF with low fees. The Vanguard SP 500 index ETF (VOO, i believe)  is a decent choice - it has solid historical returns and low fees. That's a set-it-and-forget it option - you won't turn a huge profit, but you're unlikely to lose money unless the market crashes. Of course, everyone has opinions about equity vs debt vs alt investments, so you'll likely get many thoughts here. Your primary limiting factor, of course, is time. You want to be able to take this money out again in 18 months to spend on a new property, so certain investments just won't work for you, you need to keep this cash fairly liquid.

Another potential option, if the numbers work for you, would be not to sell your current property and convert it to a rental instead. If you rented it out and could, if called upon, demonstrate your intent to keep it as a long-term investment, you could, potentially, use a 1031 exchange to sell it and buy a new investment property down the road. There's no specific timeline for how long an investment prop needs to be held for it to be 1031 eligible, but most people feel comfortable at a year or more. The primary issue is being able to show your intention to hold it. Of course, if you convert it to a rental and the cash flow is good, there may be no reason to exchange it anyway. However, this option would require that you not need to sell the current property in order to buy your new AL lake-side residence in 18 months, so this may not be feasible. Just a thought.

Best of luck!

Clayton