I had a call from a duplex owner the other day who was considering selling.
He’d owned two duplexes free and clear. The cash flow was great. He had good tenants and help managing and maintaining them.
And yet, he was in a quandary.
He needed cash for his kids’ college tuition and was thinking of selling.
The trouble is, if he sold and did a 1031 exchange, any money he took out of the exchange would result in capital gains tax and depreciation recapture.
And if he exchanged the entire amount of his equity, it wouldn’t result in him obtaining the cash he needed.
Of course, if he sold the two properties and simply cashed out, he was likely to lose a great deal of his equity to the government.
As we worked to come up with a strategy to solve his problem, I reminded him that he could always get a line of credit on his properties, and take the money out without paying the taxes and depreciation until the day he sold them; hopefully sometime in the distant future.
One of the greatest advantages of owning real estate rather than stock is we can avail ourselves of the equity without either paying taxes or losing the asset. It was good for both of us to be reminded there are times when the best strategy isn’t to take money out to buy something bigger or more units.
Sometimes the best use of equity is to help us fund our lives.
After all, isn’t that why most of us bought it in the first place?