The same out-of-pocket dollars — $23,489 at closing in late 2019, plus $1,924 more in 2020 when the rental ran negative — placed into a rental house, a total-market index fund, a savings account, or a single stock. Identical amounts, identical dates, nothing withdrawn.
| Line | Amount | Note |
|---|---|---|
| Sale price (Zestimate) | $118,800 | Zillow range $103k–$133k |
| Less selling costs (8%) | −$9,504 | Commission, title, transfer |
| Less adjusted basis | −$52,656 | $67,000 cost less $14,344 depreciation |
| Taxable gain | $56,640 | Split into two buckets below |
| Depreciation recapture | −$5,465 | $14,344 at 25% + NIIT + state |
| Long-term capital gain | −$11,885 | $42,296 at 15% + NIIT + state |
| Tax already paid on rent | −$3,996 | Ordinary rates on Schedule E income |
| After-tax result | $60,828 | vs. $82,174 pre-tax |
Section 1031 lets you roll the entire gain into another investment property instead of writing the IRS a check. The equity that would have gone to tax keeps working. Hold to death and the basis steps up, and the deferred tax is never paid by anyone.
| Step | Rule | Your numbers |
|---|---|---|
| Qualified intermediary | Must be engaged before closing; you may never touch the proceeds | — |
| 45-day identification | Name replacement properties in writing within 45 days of closing | 3 max, typically |
| 180-day close | Acquire the replacement within 180 days, no extensions | — |
| Replace the value | New property ≥ relinquished sale price, or the shortfall is taxed as boot | ≥ $118,800 |
| Replace the debt | New debt ≥ old debt, or add cash to make up the difference | ≥ $43,842 |
| Carryover basis | Old basis follows you; depreciation restarts on the excess only | $52,656 carried |
| Tax deferred today | Grows at 7% for 20 years if reinvested | $17,350 → $67,000 |
Traps: taking any cash out at closing creates taxable boot; replacing with less debt is also boot; a property held in a multi-member LLC can't exchange at the partnership level, so a "drop and swap" has to be set up well before a sale.
Loan proceeds are not income, so a cash-out refinance is tax-free: no recapture, no capital gains, no 45-day clock. You keep the appreciation, the depreciation deductions and the rent. The cost is a much higher rate than the 5.75% you're carrying, and a payment that eats the cash flow.
| Scenario | New loan | Cash to you | P&I / mo |
|---|---|---|---|
| Today (no change) | $43,842 | — | $280 |
| 70% LTV at ~8.25% | $83,160 | $36,823 | $625 |
| 75% LTV at ~8.25% | $89,100 | $42,585 | $669 |
| 80% LTV at ~8.25% | $95,040 | $48,347 | $714 |
| What the rental can actually carry | ~$81,700 | ~$35,400 | $613 (DSCR 1.0) |
Investment-property refinance rates in October 2026 run roughly a half to a full point above owner-occupied, which is sitting near 7.4%–7.9%. At 75% LTV the payment rises about $389/month, roughly $4,700/year, against ~$7,400/year of cash currently available for debt service. Most lenders want DSCR at or above 1.20, which caps this nearer $68,000 of loan and about $22,000 of cash out. Assumes 3% closing costs rolled in.