How Ed Used a 1031 Exchange to Go From One Rental to a Two Unit New Build

Ed’s Cambridge, MD single family rental had performed reasonably well, but he was ready for a change:

• Purchased in 2021 for $230,000, plus $50,000 invested in improvements
• Self-managed, very hands-on
• Took significant bonus depreciation via a cost segregation study, meaning a straight sale would trigger a large capital gains tax
• Sold for $340,000
• Would have owed roughly $24,000 in capital gains taxes on a straight sale

Ed’s motivations for exchanging came down to four things:

• He believed the market had flattened out, with little room left for appreciation
• He wanted to keep a low interest rate
• He wanted a newer property
• He wanted to be more passive going forward

The bonus depreciation Ed had taken through a cost segregation study meant that a straight sale of his Cambridge property would have come with a real tax cost, an estimated $24,000 in capital gains taxes. A 1031 exchange let him defer that liability and instead roll his full equity into a new property.

The exchange also solved the specific things Ed was looking for:

• Growth potential: He moved out of a market he believed had flattened and into a brand new property and Texas market with more room to appreciate
• Passivity: He shifted from active, hands-on management to a more hands-off approach
• Diversification: One unit became two, spreading his risk across a duplex instead of a single rental
• Rate preservation: He secured a 3.75% interest rate on the new property