In 2017, I sold two rental properties in Washington State. They both had positive cash flow, but I felt I could do better by redeploying the equity in those properties elsewhere. The problem with selling investment real estate is you get hit with capital gains taxes. The only way I knew to defer the estimated $30,000 tax bill was to do a 1031 Exchange. In a 1031 Exchange, I would sell the two rental properties and buy a property or properties of equal or greater value, and no taxes would be due until I sold the new properties.

The problem was; I didn’t want to buy more Washington properties in the then-current seller’s market, and I didn’t want to buy something in another state that would be difficult and time consuming to remotely acquire and manage, especially while still working full time. As painful as it was, I had resigned myself to paying the $30,000 tax bill and moving on.

In December of 2017, I was contacted by an investor colleague who presented me with an opportunity to invest in automated teller machines (ATMs) using Section 179 of the IRS code. In Section 179, a taxpayer can deduct the entire cost of certain business equipment in the same year it is purchased instead of deducting or depreciating the purchase over time.

So, I purchased six ATMs for $104,000, and the entire purchase price was deducted as a business expense in 2017 and used to offset the capital gains from the sale of the two rental properties. Additionally, the ATMs pay me $2,155/month for seven years (84 months), and will then be sold at market value.

While this investment didn’t meet my normal investment criteria, I have exceptions; and one of them is when I’m trying to solve a tax problem. So, was this a good investment? Let’s look at the numbers.

When you use an internal rate of return (IRR) calculator and factor in the $30,000 tax bill I avoided (received a $3,056 refund instead) and the 84 monthly payments of $2,155, you get an IRR of 35.124%.

Not bad for just writing a check. And you should know, that I’ve never seen these ATMs and never will. They are completely managed by a third party.

Below is a screenshot of my my 2017 tax return showing the $104,000 business expense for the ATMs, and the IRR calculator results showing the 35.124% return.