My Short term Plan

I recently took a new job that will be able to cover all of my monthly bills and then some. So I’ve started thinking how I can work REInvesting into my future for my best benefit. Here is my thoughts so far and I’ll follow up with a couple questions. Please tell me what you think.

For the next 3-4 years, I purchase properties with a minimum 30-40% equity and hold them as rentals. My goal is to acquire $300k minimum in equity and cash flow throughout. I plan to mainly buy homes that I can rent, but will not pass up a flip if I find it. I’d like to sell in about 4-5 years and have plenty enough to pay off my mortgages and any other debt and then some.

At that time, I’ll be 100% debt free and barely over 30 years old. From there, I would consider quitting my job and go full time into real estate investing, or start another business and work for myself. But the benefit is having the choice to quit anytime if I wanted to, and to not be dependent upon a paycheck.

If I were to cash out in it’s entirety, what type of capital gains % would I be looking at paying?

Would I be able to sell all, and roll all the profits over into a larger investment like an apartment building or large multi-family? I thought that if I did this, I could pay cash for the investment and then pull a loan out on it, and still pay off my home and then hold the property as an investment.

Thoughts or suggestions?

Sell and buy new property via 1031 exchanges. When you are ready to retire, cash out via 1031 exchange into a TIC and live off the interest. If the TIC is dissolved/sold, do a 1031 exchange into another. You will avoid capital gains taxes all together.

If you have excess cash, you can start a company and fund a retirement plan or employee benefit association to provide tax free benefits to yourself.

Thanks BLL. follow up question…

I understand the basics on a 1031 exchange, but can you help me out on the TIC, and “living off the interest” part, or give me a link to where I can learn about it? Maybe an example. Thanks.

If you plan to “live off the interest” when you retire, you could also consider “living off the rental income” as well. Rental income is passive and is taxed at lower rates than wage or interest income. You also keep the schedule e deductions for owning and managing rental properties.

My parents are retired and they have a handful of rentals they keep for “perpetual” income (about $9K per month). All the properties are mortgage free and they write off maintenance and property tax expenses each year. They have been advised in the past to sell their remaining properties and invest in TIC for interest income, but the increase in income tax and the fact that even the interest won’t give them as much as $9K per month makes it more logical for them to keep the properties and live off the rental income.

TIC is Tenants In Common and it is just common ownership for a larger project, like a large mall or residential complex. A management team handles the day to day operations and sends you a check. You need to conduct due diligence on the management team and the project, just as you would with any investment. I like them because I can convert rental income into an income stream without paying capital gains taxes.

You could live off rental income, like DealHunter says, and that definitely has it’s pluses, but my idea of retirement is to collect a check each month. You’ll have to decide what makes the best sense for you.

I’ll give you credit for thinking about this now. You have so many options and even advanced planning will be cheap because you have no gift tax concerns.

My plans were to go straight into RE investing initially, but as this job presented itself I got to thinking about the possibilities of acquiring real estate over the next 3 years or so and then using it to pay off my mortgage and other debts, and then I am free to do whatever I wish and not have to worry about my bills and liabilities.

I truly am not much of an employee, and that is why I came up with a short term plan so I could quit in 3-5 years and start a business or invest on my own, etc.

Under a plan like the one you mentioned (selling via 1031 and buy into a TIC), would I be able to pull cash back out, so I could pay off all my debts? Maybe I’m seeing too shortsided with wanting to be debt free, but I love the idea of paying off my mortgage and other debt at the age of 30.

TIC is more like an annuity IMO. You pay for an income stream. That is how I use them, but depending on the agreement, you may be able to cash out or sell to another investor. If you think you will need the money, I suggest you look elsewhere than TIC. There are other investments that have better liquidity.

I like the idea and from what I’ve read today researching TIC usage, it sounds great. My initial plan was to sell my properties that I accumulate over the next 3-4 years, and pay off my mortgage and any other debt. I had considered 1031’s as to avoid not losing so much money to capital gains, so maybe I should re-work my plan to give me enough profit to do both, pay off my debt with some of the properties and then roll the others over into something else.

You have a great plan for success. Good luck on it!

Deal Hunter,

On my tax return, net rental income is taxed at my ordinary income tax bracket rate – the same tax rate that applies my interest income. Perhaps you could tell me what I am doing wrong?

Active or Ordinary income refers to your salary, or what you make from the business by performing job-related tasks. This portion of income is subject to Social Security and Medicare taxes, or employment taxes,

I don’t know how you have it set up, but my income (and expenses) from my rental properties is listed on a Schedule E. The income from schedule E is not subject to employment tax, FICA, SS, etc. that is calculated from ordinary (or wage) income - hence the effective tax rate is lower.

Am I correct in assuming that you can do a 1031 when you sell more than 1 property, as in selling 10 properties and rolling all of the profits into a much larger investment?

Also, I’ve seen someone say here that you can buy a home with a 1031 exchange and then move into it, keep it for 2 years and sell it and keep the profits. Is this accurate?

Check with your accommodator for the specifics.

That’s small time thinking and too inconvenient. Once you start a family, you won’t want to move every 2 years.

Oh yeah, I’m not referring to doing that. I was just considering what some of my options will be in 3-4 years under my current plan.

Deal Hunter,

I guess you did not read my question. I did not compare the tax structure of wage income to your rental income. I was asking about the tax structure of your interest income. You said that rental income is taxed less than interest income.

On my tax return, both rental income and interest income are taxed at the same income tax rate that applies to my other ordinary income.

There is no limit on the number of investment properties that can participate in the exchange either as the relinquished property or as the replacement property.

Also, I've seen someone say here that you can buy a home with a 1031 exchange and then move into it, keep it for 2 years and sell it and keep the profits. Is this accurate?

As a general statement, this is true. However, there is a five year timeline before the sale profit can qualify for the capital gains exclusion, and all of the profit is not always tax free.

For property acquired as the replacment property in a 1031 exchange to be eligible for the primary residence capital gains exclusion, all of the following requirements must be met

  • The replacement property must be used for a valid investment purpose at least two years to establish the 1031 exchange, and,
  • The propertymust be occupied as your primary residence at least two of the five years prior to sale, and,
  • You must have owned the property at least five years prior to sale.

If all of these requirements are met, then the first $250K in sale profit per taxpayer can be excluded from capital gains taxes. Profit that exceeds the capital gains exclusion amount is still taxed as a long term capital gain


My interest income (from hard money lending) is on Schedule C business and my rental income is on Schedule E. I’m not a CPA, so I’m not really sure what IRS section to draw from, but passive schedule e rents and partner distributions are not included in the business income total for calculating taxes?

Maybe it’s because my spouse has a W2 which is totaled and taxes calculated with anything reported on sch C? I just know that if we don’t use sch E for the rents, our total tax bill does go up. I make my CPA run different scenarios to come out with the best outcome.

How does that work with the 45 day identification period? Does the 45 days start when you sell your first property? What if it takes you 6 months between the time you sell the first one, and the last one? It seems like you would have to sell them all at once to make it work?


Yes, the 45 day identification period starts on the day you settle on the sale of the first relinquished property. Remember, the question is “can you exchange many properties for one?” In this case, there is only one exchange window, and only one 45 day identification period.

If you have not already located the property you want to exchange into by the time you settle on the first relinquished property, then you have only 45 days to locate the replacement property, get it under contract, and then formally notify your qualified intermediary of the “identity” of your replacement property.

Nothing says that you can’t start locating your replacement property long before you even begin marketing your relinquished property for sale. Even if you put your relinquished property under contract before you start locating your replacement property, you can still use the time between the contract date and the settlement date to locate your replacement property and possibly get it under contract.

Once you have completed the settlement on the first relinquished property, you have 180 days to settle on the sale of all your relinquished properties and to complete the acquisition of your replacement property. Works best if all relinquished properties are to be sold in a block as a package deal.

Thank you for clarifying the source of interest income. I agree that the interest income from your hard money lending is active income subject to both ordinary income taxes AND self-employment income taxes, just as wage/salary income.

This is not the same tax treatment that applies to interest income reported to me on the 1099-INT that I get from my bank for the interest earned on my deposits and CDs, and, from my stock broker for the interest earned by the US Treasuries, the corporate bonds and the enhanced income securities in my stock portfolio. This portfolio (investment) interest income reported on Schedule B is subject to ordinary income taxes, but not self-employment income taxes – just like the net rental income from Schedule E.