1031 exchange minimum value?

Question

Hello,

I want to sell a SFR in a 1031 exchange to put towards a 12 unit CMFR and finance the rest. A conservative estimate for the value brought to the exchange is only about 150k after paying off the existing debt and sale closing costs. I'd like to do a 1031 to delay the 15% capital gains tax, even if it isn't that much in my situation. Is this enough value to warrant a 1031? Looking for validation before I reach out to a QI and get laughed at. Thanks for any help/advice.

Whitney Nash · Answer

As a QI, I can confirm that the other answer is correct, there is no required minimum to put into and use for a 1031 exchange. You just want to make sure that the cost to do the exchange (fee to the QI) is less than the amount of tax that you would be deferring. In your case, it would be worth it to do a forward exchange. Also, I've had clients put much less into an exchange and would never dream of laughing at them/the amount. I don't know a QI who would, so don't worry about that. :)

Dave Foster · Answer

@Anthony Alexander, How much tax saving is worth a1031 is a matter of personal choice.  I've had clients who have paid hundreds of thousands of dollars in tax rather than 1031 just because the timing wasn't right or for some other reason personal to them.  My favorite client of all time sheltered about $500 in tax after all was said and done.  I asked her if she was sure she wanted to do the 1031 and her response was "That $500 is my money.  You bet I do".

Money is money and it all helps you move forward more quickly in a 1031 exchange.  There is one more thing you need to be cognizant of that no one has mentioned yet.  There are actually two more sources of tax that will bite you if you don't factor them in.

Michigan has a state capital gains tax that is deferred in a 1031 exchange.  And the other hidden gotcha is the recapture of depreciation that will happen if you don't do a 1031 exchange.  So many investors and even QIs don't know this.  And many times an investor may choose to forgo a 1031 exchange when in fact the tax consequences are much higher than they would have thought.

You need as accurate a picture of your potential tax liability as possible.  That's critical to start with.  so critical that we have consultants dedicated to working with an investor personally to help them understand their "hand grenade math" tax liability before they decide to move forward.  As you explore that you will find your personal answer to the question of whether it's worth it.

Dave Foster · Answer

@Pierre E., The valuations for both the relinquished and replacement properties are set by the net sale and purchase price on the settlement statement - what you actually sold for minus closing costs and commissions, and what you actually purchase for plus normal costs of closing.

You can go into contract for your replacement property at any time.  But to complete the 1031 exchange you must close the sale of your old property before you can take title to your new property.

Pierre E. · Answer

Interesting! Love the input. I am really excited to employ this strategy to scale in the next year or two.

Follow up question, What is the value of the relinquished property based on? List price? Appraisal value? Sale price?

Can I go under contract for the replacement property before the relinquished property is sold?

Anthony Alexander · Answer

Thanks very much for all the answers

Marcus Auerbach · Answer

Much of the "cost" of a 1031 is that you loose a lot of room to negotiate your purchase because you are constricted by rules. That may cost you more than you safe.

Paul Pratt · Answer

@Anthony Alexander there is no minimum value! Just keep in mind that money from will go straight to an intermediary. Which you will use for your next property which must be identified within 45 days, and purchased within 180 days. The property needs to also be higher in value as well or you'll have to pay capital gains tax on the difference.

Hope this helps!

Bill B. · Answer

You also want to clarify what you mean by…

”A conservative estimate for the value brought to the exchange is only about 150k after paying off the existing debt and sale closing costs.”

Debt payoff has nothing to do with the amount of taxes that would be due. All that matter is what did you sell for, minus selling costs minus adjusted cost basis. (Original purchase minus depreciation.)

If you buy a property for $100k. Sell for $220k have $20k in closing costs you’ll owe capital gains tax on $100k. if you own it outright and walk away from the table with $200k in “cash” or owe $200k to the bank and walk away from the sale with zero cash. Plus depreciation recapture.

By the same token you could buy for $500k, sell for $400k, pay off a $250k mortgage and walk away with $150k tax free, because you lost money on the deal.

The only difference the “cash” matters is that it must all be invested and you much never have control over it.

Anthony Alexander · Answer

Thanks!

1031 exchange minimum value?

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