Selling a rental house and a vacant lot. What to do with the cash.

[Joel Schiffer]

After sales i'll have about $300k.  I'm experiencing analysis paralysis.  If I want to save ~$60k in cap gains tax i need to 1031 into something.  Or, should i just pay the tax and throw it into the S&P500?  I figure over 10 years that's only 2% a year in taxes.  1031 isn't a ton of savings spread out.  People here advise against paying all cash for a house but at the moment my market has negative cash flow on rental properties at 20% down.  Should I buy a nicer/newer primary residence, rent it for 24 months, and then move in to satisfy the 1031 requirements? s&p 500? or some other strategy?  

[Dave Foster]

Thanks for that shout out and good analysis @Guy Yoes. @Joel Schiffer, anyone whos ever had a leaky faucet with a small drip  would tell you that absolutely a little bit over a long time is - a whole bunch.  

It's all about opportunity cost.  That $60K in tax today is preventing you from making maybe $6000 in income every year (at 10%).  Pay the tax and it will take you a bunch of years of S&P investing (at 10%) to simply earn that back not including recouping the lost income from the $60K during that time (and the lost income from the lost income etc).  I live in the world of 1031 so I am biased.  But I practice what I preach.  And I would almost never recommend breaking the deferred compounding to move your money into non-real estate.  Keep your real estate investments on one side and your non-real estate investments on the other.

The one exception would be if you are totally done and opposed to and sick of all types of real estate investing both passive and active.  Or if an incredibly high return investment opportunity in non-real estate ( I would include syndication in this because these are investments in partnerships not real estate).  Only an obscenely high promisted rate of return would tempt me to give up my deferred tax.  And even then I'd be so suspicious why someone can offer me that much that it would offset the compounding from my 1031s.

So In that case then yeah I suppose (he says with a gag reflex) it's probably OK to pay the tax. 

But I like what Guy is doing moving to DSTs and passive 1031 compliant investments.  And I like your idea of 1031ing into a nice house and renting it for a year or two and then converting it into your primary.  Then you could sell your current primary and that money up to the primary limits would ge tax free without having to give up your tax deferra.  And every year you live in the converted property you get to convert some of the deferred gain into tax free gain!!!

Both of these strategies can be very effective and I do discuss them at length in the book Guy refers to.  It's called "Lifetime Tax-Free Wealth: The Real Estate Investors Guide to The 1031 Exchange."