Selling a house that was going to be a BRRRR

1031 Exchanges
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Selling a house that was going to be a BRRRR

Jacob Daniels
Member since 2020 · 4 posts · 2 votes

Hello all!

We recently purchased a property with the intention of holding it as a rental. Property went under reno for 4 months and fully updated everything. Its been sitting on the market as a rental for about 2 months, with price decreases every 2 weeks or so, however no one is biting at it. At this point, im considering just selling it. Can i use a 1031 exchange if i only held the property for 6-7 months, since my original intention was to make it a rental?

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Whitney Nash
CES® , Qualified Intermediary for 1031 Exchanges · McKinney, TX · Member since 2018 · 42 posts · 144 votes
3y

Hello @Jacob Daniels

Since your intention was to rent it out and you have proof that you have been trying to rent it, you should be able to do a 1031 exchange. You would still want to make sure that it makes sense to do so regarding your adjusted basis, taxable gain, etc., though. Be sure to save the documentation for everything that shows (substantiates) your intent and efforts to rent it just in case you do a 1031 and are ever audited. 

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  • Whitney Nash
    CES® , Qualified Intermediary for 1031 Exchanges · McKinney, TX · Member since 2018 · 42 posts · 144 votes
    3y

    Hello @Jacob Daniels

    Since your intention was to rent it out and you have proof that you have been trying to rent it, you should be able to do a 1031 exchange. You would still want to make sure that it makes sense to do so regarding your adjusted basis, taxable gain, etc., though. Be sure to save the documentation for everything that shows (substantiates) your intent and efforts to rent it just in case you do a 1031 and are ever audited. 

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  • Ray Hage
    Investor · Fort Lauderdale, FL · Member since 2020 · 1k+ posts · 755 votes
    3y

    Are you sure you really want to sell it? Are you marketing it everywhere you can like CL, FB marketplace, IG, OfferUp, Zillow, and/or with a Realtor? It could be that it is not getting enough eyeballs on it or that you priced it too high for the market. If you don't have another investment ready to go, it may be worth holding a bit longer to ensure you are at the right price point and have a good marketing strategy for it.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    3y

    @Jacob Daniels, I don't think the hold period is going to trip you up.  It sounds like you may have actually purchased it in 2022.  If you sell now it would still put the purchase and sale on two consecutive tax returns.  So the optics aren't horrible.  But, there is no statutory holding period.  It is all about your intent and how you can demonstrate it if questioned.  Keep your rental advertising posts, take pictures of the sign in the yard.  File away correspondence you would have had with your accountant about setting it up as a rental on your taxes as well as with the property manager if you interviewed some.  Any and all of this might be used.  

    You'll also want to do some quick calculations to see if you even need to do a 1031.  Your basis plus the improveents might negate any forced appreciation there is.

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  • Dylan Speer
    Investor · Denver, CO · Member since 2023 · 161 posts · 52 votes
    3y

    Hey Jacob, 

    What are your plans with the property after a 1031 exchange?

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    3y

    It sounds like you have a rent-ready property.
    if you 1031 exchange to another property, you will incur 6% - 8% in closing costs along with getting a new property that you will have to figure out how to convert to a rental.

    I would gather up comps and see what the true market rate is for your property.
    Market it for 5% less than the FMV is to get a tenant in there.

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