We have a rental property in a city 2 hrs away but it’s pretty rundown and nearing the end of the lease with current tenant. Should we do a 1031 exchange with these terms: sell property for $1M (originally cost $550K), pay cash for $1M replacement property in our HCOL city that rents out for $4500/m? It’ll net ~$25K a year and we save on capital gains taxes from the sale… or just sell, pay the taxes and buy VTI? We don’t want to manage rentals outside of our city anymore.

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Rentals are not passive income unless you hire a management company and even then you still have issues

You have to decide how valuable your time is and if the extra profit is worth dealing with tenants.

Unless you’re gonna go all in on real estate, I would just put into VTI

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The real estate can serve as a diversification anchor… the 1031X sounds attractive as you won’t have to worry about the CapGain and depreciation recapture… an index fund might outpace the real estate… and your only getting a 2.5% CapRate on a $1M property… typically you want to target a CapRate of closer to 4%-6%…

Depending on your parent’s situation… you could technically pass it up to them… then at death, receive the property back with a step-up basis… effectively riding yourself of the capital gains entirely… but that’s a different conversation…

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How much would you net in proceeds from the sale? How much do you care about cashflow now vs appreciation? How much do you expect said $1M property to appreciate in the future?

VTI averages 7% per year. Assuming you’re investing $500k or more, youd probably have more long term growth via VTI. Even if you’re paying 20% long term cap gains against that ~$500k in gains (assuming you don’t have too bad of a depreciation recapture), VTI would probably grow more on average than a replacement property in most circumstances. But there are some scenarios where real estate may come out ahead.

I have some rental properties myself, so I understand the conundrum. VTI is definitely outpacing the appreciation and cashflow of my rental properties over the last 3 or 4 years. But a bit of diversification isn’t a bad option.

1031. Diversify your income and netting $25k a year is solid.

Netting $25k on $1M invested is terrible. You could easily buy bonds netting 4% or so.

Buying a $1m rental property that nets $25k a year is a bet on appreciation almost exclusively.

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