How to qualify for a 1031 exchange

Question

I purchased a property in July 2021 with the intent to BRRR, so I have owned the property for over a year. However,  I’ve decided to sell because interest rates have skyrocketed and the market in this area has gone up significantly. How long do I have to rent or attempt to rent the property before I can qualify for a 1031 exchange given that I have already owned the property for a year.  I understand that I also would have to meet other deadline criteria (especially 45 and 180 days).  Thanks for your help.

Jon Abbott · Answer

I am just getting into rentals. I had an incomplete understanding of 1031s. My property doesn’t qualify. I purchased the property at auction and it turned out to be a lot bigger project than I anticipated. I have not rented it yet. I live out of state. Thankfully, the market went up significantly. Again thank you very much!

David M. · Answer

@Jon Abbott

Its needs to be an investment property for a year, generally.....  Be careful it doesn't look like a flip since that is NOT investment, it is dealing inventory which is ineglible and taxed as active income subject to also self employment tax.

Meanwhile, you realize that to 1031 you have buy just as much as your sold, in general?  So, what are you looking to buy and do you have the additional cash?  Also, what sort of taxable gains are you really looking at deferring?  If you haven't rented it, you haven't taken any depreciation.  How much really has the property appreciated?  Paying ~15% on the gain isn't really that bad when you've made money and just to get out.  Otherwise, you are saddling yourself with another rental property.

Also, if you purchased the property Jul2021, you didn't get the rehab done before interest rates rose?  What's going on?  What are you really trying to do?  If you were going to rent it, the interest rate shouldn't matter.  If you were going to sell, the interest rate still doesn't matter.

Jon Abbott · Answer

Thanks. That’s very helpful. You helped me understand that a 1031 doesn’t make sense in this case.

Bill B. · Answer

It’s hard to use higher rates as the reason to do a 1031 as you will have a large loan under the 10e2 than you would have if you kept the current property. I assume you’ve been renting it out for the last year. Please don’t say you’ve spent 13 months doing rehab on an empty property. If you haven’t rented it out, it sure looks like a flip. Have you been living in the property as your primary evidence? If so, live there another 11 months to make it tax exempt instead of tax deferred. If you have been renting it out then simply buy a property that costs more than your net sale and invest all ch you receive. If you haven’t rented it out and haven’t lived in it, after I ask WTH have you been doing? I’d say you put a tenant in it and you can go ahead with the exchange. If your complaint is you won’t get as much with a tenant, that’s why it should have been ended before and why you should be doing the 1031. In this market there is zero chance you’ll be able to say “I advertised it in a reasonable way at s reasonable price for more than 1 week and didn’t get 100 applicants.’