Capital gains tax vs. 1031 exchange

[Carolina S.]

Hello BPs community, thank you in advance for any thoughts shared.

I just sold a rental property which had quite a bit of equity from appreciation and principal pay down through the years. I have it all set up for a 1031 exchange and I am now under the 45 day countdown. At the same time, I am also using this opportunity to move that capital into an LLC, and would look to extra financing to purchase a new property or properties of equal or higher value (per 1031 exchange requirements). The downer is that financing through an LLC would mean "commercial loan" which has a high interest rate of nearly 9% in today's high rate environment. I'm likely staring at negative cash flow net of that high rate, or at best breakeven.

Of course, to complicate matters (and here starts my dilemma), I am also rebuilding on my primary residence. I can rebuild it through financing it or through using the proceeds from the rental I just sold that is currently marked for 1031 exchange. If I finance the rebuild then the 1031 exchange presents some challenges (I will need to land a property that cash flows or breakeven so that I can get the loan for my rebuild, or banks will count that debt against me).

The alternative is I pay cap gains taxes and dump the capital into my rebuild project on my primary which would allow me to rebuild without any financing at all.  This will force a lot of equity into my primary especially once the rebuild is complete. This would also allow me to keep my primary at a low rate loan.  However, I would miss out on the benefits of 1031 (deferring taxes and having more capital to invest).

Which is the better route?

How are folks navigating 1031 and high financing rates vs taking capital gains hit and having pure cash on hand to redeploy elsewhere (in my case, rebuilding on my primary residence)? I’m thinking I can explore a home equity loan latter when I am ready to invest again. Thoughts?

Thank you!

[Bill B.]

What's the purpose of using the LlC other than to make it harder and more expensive? It will have to be a pass through/disregarded LLC to keep the tax payer the same and the 1031 valid. I "hope" you are not married or it will make it very difficult as you can't have a disregarded multi-member LLC except in community property states. And I don't think Va is one.

Do the math and the answer will probably be obvious. 

Figure out the state and federal capital gains tax and depreciation recapture after selling costs. That's possible savings. Is that enough to proceed? If so, is it even possible to use an LLC in your case? If so, how much is it costing you? $800k at a couple extra percent means it's costing you AT LEAST $16k PER YEAR in additional interest. What are you getting for that? I don't think you're getting $2k worth of benefit, much less $16k every single year.

Personally I'd do a 1031 to save $40k, I'd skip the LLC, increase the limit on my umbrella, and call it a day. These are all assuming there's a problem with the current rental or the new properties are amazing. Otherwise I'd keep he current property and get a heloc on it or my primary. Don't over complicate it. Good luck.