Seattle rental scenario

[Mike Masland]

Background

My wife and I have lived in a single family home located in Seattle, WA for the last 4 years. We love it, but need to move. We owe $590k on mortgage and could probably sell the house for $900k so let’s call it ~$260k in equity after fees.

We want to keep the property as a rental (our first) betting on the appreciation of the property over time (location is great for Bellevue/Seattle commutes, neighborhood is receiving significant investment year-after-year, lightrail stop coming in 2 years, grocery store coming, etc). I understand this is risky, but we're willing to accept that. We’ve done the math and are confident we can break-even on cash flow (cover mortgage, insurance, upkeep, prop mgmt fee, etc).

Scenario

'Assuming the property market remains flat, I THINK we can make around 20k/year as we accumulate about $12k/year in principal pay-down and another $8k/year in tax savings (our marginal tax rate is 32%) by maxing out our 25k passive loss allowance for non real estate professionals as per IRS publication 467(c)(7) through a combination of deducting our mortgage interest on the property (we pay about 22k year in interest) and depreciation (1/3 of purchase price was home structure at time of purchase).

Questions

1. 1. Is the ~20k/year assumption correct? (if market is flat and net cash flow is break-even)
2. 2. If we want to cash out, my assumption is that we can cash out up to ~500k tax free (married filing jointly) as long as we do it in the next 3 years (IRS publication 523). Is that right?
3. 3. If we keep the property longer than 3 years and then sell it, can we use a 1031 exchange to avoid cap gains if we want to finance the building of new properties or does 1031 exchange only work for the purchase of existing properties?

Thanks everyone

Does this sound right?