1031 exchange into DST or pay taxes to pay down debt?

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twowheeler
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Joined: Tue Jun 25, 2013 6:19 pm

1031 exchange into DST or pay taxes to pay down debt?

Post by twowheeler » Fri Jul 13, 2018 9:25 am

Hi,

Recently sold a piece of land for $475k and the money is currently sitting in escrow. We have not closed and the buyer is flexible on timing to allow for a 1031 exchange. We do not have any debt on the land. I have a broker looking for an income producing property currently and I am also looking into a DST (delaware statutory trust). The other option is to pay the $37,500 in taxes on the sale and pay off the majority of our debt which is around $550k ranging in interest of 4.5% to 1.75%. I calculated the current interest and costs involved with holding the money in escrow is $2000/month vs just cashing out and paying off the debt.

So do you guys have any advice for me? It is SO tempting to cash it out and pay off debt. I could be debt free by the end of 2018 easy. Or invest in a DST and get a 5-6.5% return. Or wait a few more months in hopes of finding a private deal with a higher return? If I do reinvest the money, we have a high savings rate and we should be able to pay off the $550k debt within 2 years.

Thanks so much for reading and any tips!

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grabiner
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Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: 1031 exchange into DST or pay taxes to pay down debt?

Post by grabiner » Fri Jul 13, 2018 11:00 pm

How long are the terms of your loans? If you have, say, a 4.5% mortgage which is not deductible, then paying it down is a risk-free, long-term 4.5% return. The fair investment return on a low-risk, long-term investment is 2.85%, which is the yield on Admiral shares of Vanguard Long-Term Tax-Exempt. Therefore, paying $100K against this loan would be a net gain of $16,500 per year at no extra risk; this makes taking the cash and paying taxes look like a very good deal. On the other hand, if you are deducting the interest on the mortgage at 32%, the after-tax rate is 3.06%, and then it isn't worth very much to pay down the mortgage rather than invest.
Wiki David Grabiner

rick2427
Posts: 103
Joined: Sun Jan 25, 2015 11:29 pm
Location: Missouri

Re: 1031 exchange into DST or pay taxes to pay down debt?

Post by rick2427 » Fri Jul 13, 2018 11:41 pm

DST are illiquid, very high fee loaded products with lots of uncertainty......If I were you, I would pay the taxes and pay off my debt.

Cheers,
Rick

twowheeler
Posts: 24
Joined: Tue Jun 25, 2013 6:19 pm

Re: 1031 exchange into DST or pay taxes to pay down debt?

Post by twowheeler » Sat Jul 14, 2018 8:17 am

Thanks for the replies. The 4.5% loan is a new HELOC with a balance of $100k and is not deductible. I plan to pay this off in the next 6-8 months so I was not considering it as a long term return scenario, but I certainly get your point and it makes a lot of sense. $160k would go to pay off our home which is at 2.75% and is tax deductuible.

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