When determining whether you should sell or keep a rental property, here's the basic order of steps we'll go through:
- Calculate True Net Equity™ so we know how much money we currently have tied up/invested in the property.
- Calculate current returns on the property in dollars: Appreciation, Cash Flow, Debt Paydown, Depreciation, the returns from the Reserves you set aside to have the investment and the returns from any Additional Investment you might be adding to the proceeds of the sale to re-invest in something new.
- Calculate the Returns on True Net Equity™ so we know how the current rental property is performing on the current amount we have tied up in the property, Reserves and Additional Investment.
- Calculate the returns on the alternative investment we could make with the proceeds of a sale of this rental property.
- Compare the returns from the current rental property to the returns on the new investment.
True Net Equity™
First, let's calculate the True Net Equity™.
|Traditional Sale||1031 Tax Deferred Sale|
|-||Real Estate Commission||-||$15,669||-||$15,669|
|-||1031 Exchange Fee||-||$0||-||$1,000|
|-||Capital Gains Tax||-||$0||-||DEFERRED with 1031|
|-||Depreciation Recapture Tax||-||$0||-||DEFERRED with 1031|
|True Net Equity™||=||$47,006||$46,006|
In some cases, you may be taking additional money you have invested elsewhere (or saved) to add to the proceeds of the sale to invest in something new.
If that's you, we need to take that Additional Investment and what you're earning on that additional investment (Additional Investment Rate of Return) into account so we can make a more fair comparison of before the sale and after the sale/re-investment.