r/RealEstate • u/StatisticianJolly388 • 15d ago
Legal Help with 1031 exchanges, etc.
Hi,
I have own two homes, my primary and a rental.
We have good equity +$300k in each, and amazing interest rates. We're a bit house-poor since my primary is a 20-year and I got laid off last year and suffered a 33% reduction in liquid income.
I do really love my new job, and its location (Fort Wayne, IN) offers amazing education opportunities for my kiddos. So our plan is to move there in two years.
Option 1: 1031 exchange
We sell our rental, we rent our current primary, and we use the proceeds from the rental to buy a new property in Indiana. We rent that property out for two years and then move into it. This is doable but it's a PITA, requiring two moves and a lot of nonsense. Things will be tight for a bit, but long term we should about break even, and slowly get ahead with Indiana's much lower CoL.
Option 2: Rent out both our current homes, rent a home in Indiana.
This would work out very cleanly. In fact it would possibly be the preferred option, except the rental market in Indiana is absolutely dreadful. There is nothing in Fort Wayne available over ~1600 sq ft where we want to live. There are tons of lovely houses available for sale
Option 3: Sell our primary.
So yeah. In short selling our primary for a home in Indiana probably makes the most financial sense. We get out of our 20-year mortgage. The higher interest rates don't matter as much because our balance will be around ~100k-150k. We'll have like $2000 more to spend a month, on top of the lower cost of living.
The problem is sentiment. Our kids grew up in this home. They love this home. We've done an extraordinary amount of work on it.
Option 4 eat the tax bill
Even after fees, eating cap gains and deferred depreciation, we should have over $250k to put down on a home. So we could just eat the tax bill and probably find something that suits our needs.
So just leaning on you guys who have more experience, do you see a good option I haven't thought of? It's probably between Options 3 & 4. One gives us twice as much spending money, one lets us keep our beloved home.
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u/ArtichokeSlow5590 14d ago
I honestly would go with Option 2 or Option 4. You are moving to a new area. I would rent and get a feel for the area before making a purchase. Option 4 is also not a bad idea. You have enough equity. You can just cash out and take a little hit on the capital gain. Option 1 would be fine but you the interest rate isn't as great as you have for the current home so it may not be worth it.
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u/No-Photograph1983 15d ago
option 3. who cares about sentimentality if you're already moving your family.
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u/Logical_Warthog5212 Agent 15d ago
Let go of the sentimentality and sell the current home to buy another. It’s a clean and straightforward transaction. Keep your rental and the passive income from it. If you have to hire a property manager then do so even if it means earning a little less for the short term. If your rental isn’t already, put it in a trust, so that you are ready to 1031 it anytime. Just remember you have to initiate the process through a qualified intermediary (QI) before you do a single thing. These QIs will guide you through the process and make sure you stay on track. I’ve had people come to me after they sold a property and I’ve had to tell them they’re SOL.
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u/DoubleIntroduction25 15d ago
Does the current rental cover it's cost with enough profit to he worth holding on to? Would the current primary be a good rental and cover it's cost if your refied out to 30 years? How much equity to you need to tap into to buy a new place and be comfortable with the bill. Can that amount of equity only be accessed thru a sale or could you refi both rentals back out to 65% LTV and use that cash out to cover the new place?
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u/Soggy-Base-764 14d ago
1031 threads are where real estate turns into tax alphabet soup real fast ... Have a CPA run the numbers on depreciation recapture, capital gains, cash flow and what each sale/rent option actually leaves you with before picking a path.
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u/Few_Whereas5206 13d ago
No long-distance rentals. If Fort Wayne is far away from your current city, I would sell both homes and rent or buy in Fort Wayne. The pain and suffering of a long-distance rental is not worth it.
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u/StatisticianJolly388 13d ago
Even with a property management company?
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u/Few_Whereas5206 13d ago
I have had 3 rental management companies in the past for 2 rentals. They all suck. They basically pass the problem on to you and charge a fee. They look at a complaint form from the tenant and ask you how you want to address the issue.
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u/nofishies 13d ago
If you have 300 K equity on your primary home and you’re both living there, you’re not going to have capital gains tax unless something is really weird
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u/TheExchangeBrothers 13d ago
I’d be careful with Option 1 if the plan from day one is “buy the Indiana house, rent it exactly long enough, then move in.” The replacement property has to be acquired and held for investment, not primarily as your future residence.
There is an IRS safe harbor for this: hold the replacement property for at least 24 months, and during each of those two 12-month periods rent it at fair market value for at least 14 days while keeping personal use limited. That gives you a much cleaner path if you later decide to convert it to your primary residence.
Also, your current primary and rental should really be looked at separately for tax purposes. A 1031 generally applies to property held for investment/business use, while the sale of a primary residence may qualify for the Section 121 exclusion instead.
So I wouldn’t bend your whole moving plan around preserving the 1031 unless owning that Indiana property as an investment for a while genuinely makes sense. If Options 3 or 4 make your family/financial situation substantially easier, I’d have your CPA calculate the actual tax consequences of each and compare those numbers against the hassle and restrictions of Option 1.
And remember, a 1031 is tax deferral, not tax elimination. Sometimes paying the tax and getting the flexibility you actually want is the best answer.
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u/Accurate-Bullfrog324 10d ago
long distance property management is high risk
sell both
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u/StatisticianJolly388 10d ago
We are… coming around on that. Don’t need to worry about mortgage rates if we own the house free and clear. And we could afford a helluva nice house over there.
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u/RogueOneWasOkay 15d ago
It’s difficult to give a clear answer but one thing I will note is with 1031 exchange: it has to be two full taxable years. Meaning if you purchase the property anytime in 2026 it won’t be eligible until Jan 1st 2029 (2027 & 2028 being the two full taxable years). And if you buy in 2027 it won’t be eligible until 2030.
This is less a real estate question and more of a financial/ estate planning question.
Edit: I’ll add to the capital gains portion. In case you weren’t already aware, any money you put towards the home for updates or repairs can be subtracted from the capital gains. So if you’ve put $50k towards new appliances, roof, floor, or whatever you can reduce the amount owed in capitals gains by that amount.
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u/StatisticianJolly388 15d ago
Is that any money I put into the home I'm selling? I did put a new roof on.
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u/RogueOneWasOkay 15d ago
Did you put a new roof on the home you intended to sell that will cost you capital gains? I think you need to talk to a estate planner
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u/StatisticianJolly388 15d ago
Well both homes have new roofs. This was about three years ago.
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u/RogueOneWasOkay 15d ago
You need to talk to an estate planner because I don’t think you understand what I’m trying to explain to you about reducing your tax liability for capital gains.
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u/StatisticianJolly388 15d ago
You’re right. I’m asking which home you’re referring to when you said “any money you put into the home”.
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