Selling Rental: 1031 or eat taxes?

[Jeff Bridges]

I'm selling a rental property at a profit and intend to buy another rental property to improve cashflow and get into a more desirable and easier to manage rental. I've been running the numbers and trying to figure out my options. 1031 seems like a good choice, but finding replacement property would be very difficult. Looking to hear options from the BP crowd to see if I can look at things a different way.

existing property: est sale price 155-175k. about 87k pre-tax profit after closing. at 15% cap gain tax= 13k in taxes and another 6.5k in MD state witholding tax from the sale for a total 19.5k in taxes due. I'd have about 150k in pre-tax proceeds (same if used for 1031 transfer) from closing or 130k post tax if I sell regular method. Take a look at below options and let me know which might be best. 1031 would keep 19.5k in additional deferred taxes to be used for new possible property, but easier said than done.

option a: 1031 into another SFH property for 175-180 range with a mortgage and get mortgage for remaining amount. 20k mortgage seems like a waste.

option b: eat the 20k tax and use a straight sale of property. Buy another property I have an eye on in my target neighborhood for 90k with 20k rehab. it cashflows well and I would use the sale proceeds to cover the property, then refinance after rehab and pull out money again for BRRR. property would build about 35-40k in more equity following rehab in addition to the good cashflow.

option c: 1031 into multifamily or larger property find a 600k property, put 150k into property as 25% down, mortgage the rest. The problem I'm finding is there are not many multis in the MD/NE area and its hard for me to vet these properties. Those that exist are super pricey and the cap rate is super low for even blue collar areas.

So right now given the lack of realistic multis to parlay into, I'm considering just eating the tax. Unless there are other suggestions or new perspectives. Its really tough to envision a good 1031 replacement. Also I am not considering any baltimore city properties at this time even though they have plenty of multis. Thanks in advance!

[Dave Foster]

@Jeff Bridges and @Ned Carey and @Marla B.. I think you'd all be surprised at how affordable 1031s are.  You can find them for 2K - 5K on each coast done by an attorney who is one offing them.  For most national intermediaries there's a pretty tight range around $750 - $1,000 for a garden variety exchange.  That's pretty affordable compared to the fed and state tax on 87K and depreciation recap.

Ned's right - the withholding tax should be waived in the 1031 as MD honors 1031 at the state level.  You may have to do an application through your title company but it can be waived.

@Matthew Perry, That's a downer of a story.  I've only had that happen to one of my clients once in 18 years.  My guess is that unethical folks are figuring out leverage.  One way to combat that is to hide the 1031.  Simply use an assignable contract.  All parties have to be notified but we typically do that right at the closing table to cover any unethical thoughts on the sellers part.  Also most standard mls contracts contain an automatic or "check the box" addendum for 1031 exchanges.  This leaves you open to do one but does not announce that you are.  Good choice to walk away!