1031 or pay off primary residence (help!)

[Heather Pabon]

We are about to sell a house in San Diego that we purchased in 2011. It’s been a rental since 2013. We are set to make about $700k on it. This is our only investment property. (we do not want to stay in the CA market)

I want to 1031 into a STR and a LTR in Nashville where we now live. Obviously rates and prices are high in Nashville right now. So are rents and the STR market can be lucrative. (I already understand the permitting process so this is not an issue).

Other option presented would be take the money and pay off our primary residence (bought in 2021 $800k with a 2.75% rate) which would free up income that we could save and when rates come down we could purchase then. (Not my idea)

Looking for solid reasons people with more knowledge than I would choose either options. Also looking for a local to Nashville accountant and/or financial expert. 

Thanks for taking time to read and respond! 

[Dave Foster]

@Heather Pabon, Just on the surface if you pay off your primary you'll save around $20K a year in interest.  But you'll pay around $250 - $300K of taxes.  So it will take around 15 years to break even at that level of savings.

So a 1031 is the right move from strictly a finance perspective.  

Another option would be to go with your plan and purchase one LTR and one STR or whatever combination (just make it two properties). Make one of your 1031 purchases a really nice rental. And in two years convert that into your primary residence. As long as you own that property you'll never pay tax on it. And this way the 1031 pays for your new primary. You just have to be patient. This strategy is discussed in depth in Chapter 28 of the book Lifetime Tax-Free Wealth: The Real Estate Investors Guide to The 1031 Exchange.