Is it wise to use a 1031 exchange?

Question

Currently we have a long term renter which pulls about $500 per month after expenses. It has an open HELOC on it with $132,000 owed. Market value is approximately $315,000 to $330,000.

Our thoughts are to sell the rental which will give approximately $150,000 after closing. We are thinking of purchasing some land near Breckinridge, Colorado for $115,000. I am a contractor and I believe that I can build a 500/ 600 sq ft home for approximately $125,000. This will include all the necessary septic, well, and electrical, etc. Total costs would be around $240,000.

The property would be used as an Airbnb. According to the Bigger Pockets calculator information this area has an estimated occupancy rate of 74%. We have a friend in the same area that has a small apartment which he uses for the same purpose. He nets approximately $20,000 per year. We believe that out property could potentially net above $20,000 per year after expenses.

We are trying to determine if this is a good move for us. We are having a difficult time finding properties that can get us cash flow using the BP calculators. We are definitely looking, and are open, for great deals right now. What are your thoughts?

Scott Ehmer · Answer

You should do more research on what a 1031Exchange is and ALL of the rules regarding them. For starters, the replacement property has to be as much, or more than what you sold for. Not the cash at close of escrow, but the entire sales price. Anything that does not go into the new property is called "boot". Boot is taxed as 100% profit. The cost of future construction is not a part of the equation.

https://www.ipx1031.com/1031ex...

Mike Eichler · Answer

Huge Airbnb fan here, if you run the numbers and they make sense then go for it.  1031 is an amazing strategy to defer taxes.  Possibly try to see if you can find land with pre-existing septic and electrical to cut down costs would be my suggestion, but not the end of the world if not.

Hope this helps, let me know if you have any more questions!

Dave Foster · Answer

@Richard Lawson, I think @Scott Ehmer is probably right in your circumstance.  To complete a 1031 with all tax deferred you must purchase at least as much as your net sale (approx 300K ish for you).  And you must use all of the proceeds from the sale in your purchases (the $150K you mentioned).  You can purchase less than you sold.  And you can take cash.  But if you do you pay tax on the difference.

If all you do is purchase the land then you are buying approx 150K less than you sell.  so a potential tax event of $150K.  My guess is that eats up most of your profit - so no reason to do the 1031.

A reverse exchange could be used for the construction but, you only have 180 days from the day we take title to the lot to complete the construction.  And I'll bet 180 days don't fly in Summit County!

If you wanted to sell the property and use some of the proceeds to buy the land and buy another property so that you purchase at least the $300K and use all $150 then that might work.

Lyndsay Zwirlein · Answer

David Greene has a great book called "Long Distance RE Investing" where he discusses ROE. If you believe your equity will get a better return with your STR idea, pursue that. If you believe it's better return on your money as is, keep the LTR. However some people have different goals. If yours isn't ROE, then figure out what the end game is and how active you want to be with your investments and choose the path that is most in line with your end game.  Also we have personally owned LTR and STR. STR is a more hands on investment, so make sure you are prepared for that.  Good luck!!

David M. · Answer

@Richard Lawson

What actually is your question?  The 1031 or the STR appraoch?  Both?

I don't know what to type...

Alex Olson · Answer

While I do think a 1031 exchange is a wise decision, it would depend on your wealth track. Would buying and building and renting a short term stay be the best and fastest for your wealth building? Have your rented out an str before with amazing success? What if they change short term rental laws? Can you still make money? Why not buy a fourplex or 6 Plex with your funds?

Is it wise to use a 1031 exchange?

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