What to do with profits of vacant lot sale?

[Frank Macias]

Hello everyone my name is Frank Macias. This will be a bit of a long post but if you care to read through it thank you in advance!

I am a pharmacist in my late 30's, I have a wife, a 3 year old daughter, and a 2 month old son. I purchased a vacant lot in 2023 for $155,000 for the purpose of building a primary residence on it. Fast forward to today, we have decided to scrap the idea and now want to sell the land. I will wait until we've held the lot for at least 1 year to avoid additional taxes owed per my CPA's advice. The value of the lot is somewhere around $350,000 and for the sake of simplicity let's say I profit $200,000 from the sale. What should I do with this money?

My initial thought was to put enough in savings for a 1 year emergency fund (am I pharmacist so I am risk averse!) and dump the rest into a brokerage account which holds ETF's invested in essentially total stock market indexes (VTI, VOO etc.). But now the investor side of my brain is saying WAIT a second, why don't you do a 1031 exchange!? As you know this will defer the taxes owed on the profit of the sale, which in my case, would be pretty substantial given my salary as a pharmacist. 

Other pertinent info, I own a duplex that we currently house hack but will be moving into a new home in Babcock Ranch later this year. So we will convert our side into a long term rental. In addition, our new home will have an attached in law suite in which I intend to rent out as well. By 2030, I plan on moving my family to Poland (my wife's native country) and so I am unsure what I will do for income then. Perhaps a mixture of rental income/brokerage account gains profits/dividends or finding a remote job I can work in Poland. Also, we have no consumer debt, car loans, or student debt. The current mortgage rate on my duplex is 3.5%.

So I just don't really know what to do. Invest the profit into the stock market and get 6-10% return on my money without lifting a finger but taking on the additional tax burden of the profits? Or rolling that profit into another property(s) to obtain more rental properties to increase monthly income? What would you do if you were me? Thanks for reading my long winded post, I realize with situations like these there are no "correct" decisions only different decisions that yield different outcomes. But I am interested in your thoughts. Thanks again!

Frank  

[Alex Olson]

@Frank Macias In short, like @Dave Foster says, consider the 1031 exchange of your funds. This is a good reason why it was made. Exchange your non income producing property into an income producing property. If you are over seas you are out of state anyway and would be wise to look at other markets. Of course I am partial to KC. 

[Dave Foster]

@Frank Macias, If youre still looking at managed real estate when you leave the country you'd be well advised to look seriously at doing the 1031.  The compounding effect of the deferred tax adds nicely to your monthly income.  And if you're comparing stock returns using 6% - 10% (which is historically accurate) you want to remember that you will be making 6% on only 85% of the profit (after paying tax).  This lowers your potential return further.  There are passive conservative real estate investments that qualify for a 1031 exchange and return in the same range plus quite a bit more when you factor in all of the Internal Rate of Return components.

I always counsel folks to keep their equity and real estate investments separate. Switching back and forth can cause you to lose a lot of the benefits of staying the course and keeping things like deprecation recapture and tax deferred. Plus the advantage of leverage (modest if your a risk adverse pharmacist :) boosts and IRR dramatically.

[Alex Olson]

@Frank Macias In short, like @Dave Foster says, consider the 1031 exchange of your funds. This is a good reason why it was made. Exchange your non income producing property into an income producing property. If you are over seas you are out of state anyway and would be wise to look at other markets. Of course I am partial to KC. 

[Sean Ross]

@Frank Macias,

I can relate to your circumstances.  My wife and I are in our late 30s, we have a 2 year old son and are about to welcome a new baby. The idea of generating passive income through our investments is very attractive because, well, we've got full hands. 

(We regularly invest into indexed ETFs for this reason)

Look, you could certainly 1031 exchange to save taxes and find another property.  Since you are trading out of vacant land, you are looking to dump an asset that didn't require much management.  Investing into another residential rental doesn't make a ton of sense from my distant vantage point. 

What Dave says about the after-tax effects on selling and going the equities route is true.  It's a big selling expense. 

Perhaps look at 1031-eligible investments that are passively managed and effectively act like equities. There are deal syndications and DSTs, for example, or some NNN TIC properties that might work for you. You could go oil/gas rights. This way you are keeping passive income and saving the tax hit.

I would just lightly advise away from complicating your day-to-day life at this point given what you've told us. 

[Natalie Bender]

Hello Frank,

In the DST space our typical client is an investor that has been a landlord for decades and they are tired of the tenants, trash and toilets. Passive investing is their next step, however recently I am seeing more and more investors looking for an opportunity to stay in real estate, but this period in their lives active real estate just doesn't fit. The life of a DST is 7-10 years, some go full cycle sooner. You could always 1031 exchange into a DST now, enjoy your kids and family. Then in 7-10 years reevaluate where you are in your life, your real estate goals, investment goals then 1031 into the best fit at that time whether than be active management of a property or a different passive investment. Happy to talk more anytime.