1031 Exchange into Multifamily

Nicole Wu · 2023-07-06T20:17:26-07:00

My husband currently owns a paid-off townhome near Charlotte, NC, which is currently being rented out and generating steady cash flow. The lease is about to end, and we are considering selling the property and utilizing the proceeds to purchase a multifamily property to expand our investment portfolio. We are thinking of using a 1031 exchange to defer capital gains taxes since the sale will trigger a capital gain. Our plan is to use the entire sales proceeds of approximately to purchase the new investment property. However, we have never done a 1031 exchange or purchased a multifamily unit before, and the time requirements are stressing me out. I would greatly appreciate your advice on where to begin. Should I focus on searching for the new investment property first or on selling the old one? Is it possible to do both simultaneously? Is a 1031 exchange a feasible option for accomplishing this? Any advice or resources on strategies would be highly appreciated.

Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

3y

You want to be looking for the replacement while selling the old one. In a hot market many buyers won’t accept a contingency based on your other house selling. But get your favorites lined up and be ready. I had 5 properties ready to send offers the second we closed Friday June 30th. Saturday July 1st we had an accepted offer. (Since our offer had a huge down payment and no contingencies…)

I used @Dave Foster he’s been on BP for years and is not only Knowledgable but helpful. If you have questions check Amazon. He just released a short book that will answer most of your questions. I’m sure he’d personally answer the rest of you reached out to him.

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Whitney Nash

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

3y

Hello @Nicole Wu

Based on what you wrote, a 1031 exchange is feasible for your situation, but I would want to confirm after learning more details. As @Bill B. wrote, I would also recommend that you look for replacement property while selling your townhome. You can even be under contract for the replacement property before you close on what you're selling. Just make sure that the purchase closing date is after selling closing date so that you don't have to do a more expensive and complicated reverse exchange. I typically recommend at least a week cushion just in case there is a delay of some sort.

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Corby GoadeBusiness Member

Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes

3y

Great advice above- a couple more things to consider:

-You could do a reverse exchange. It would give you a longer timeline and probably be less stressful, but they are more complicated and costly.

-It's vital that you work with an experienced agent for these transactions. Knowing the timelines and how to write contracts that achieve your goals while still protecting your interest (and EMD/Funds in escrow) is important. Not just any agent will do.

Best of luck!

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

3y

@Nicole Wu, A reverse exchange that @Corby Goade refers to could work. But they do get rather pricey. The best thing you can do is to be cognizant of the time crunch. But don't let it cause a panic. There are a number of ways to mitigate that tight time crunch. I do spend a chapter in my book on this. but here's a short laundry list:

1. As others have mentioned - go into contract on your new property and then sell your old property.

2. Use contingencies - I know they're less popular at times in the market. But I'm not simply suggesting asking a seller to sell you their property contingent on you selling yours. In a sellers market you can offer the same terms to a buyer for your property - you'll sell your property to them contingent on you finding the right replacement.

3. Speaking of contingencies - It's very common for SF and MF or commercial properties to have very different timelines to purchase. You can make the longer due diligences and other contingencies of a multi family property extend your closing to give you more time to get your other property sold.

4. Use turn key companies who will many times be able to hold a property for you while you sell yours.

5. Go into contract now on a new construction that won't be done for a year. Once it gets to within 3-4 months to completion execute your sale.

6. And lastly and my least favorite - never be scared to simply forgo the 1031 exchange if this is the perfect property and you can only get the one. If it's that good of a deal the pain of the tax won't stay with you forever. No one ever went broke paying tax on profit. It just feels like it.

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Alex Olson

Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes

3y

To piggy back on to what @Dave Foster says - you can build in extensions in to either contract. It takes a good multifamily agent who understands 1031 exchanges to give you the best chance for success.

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1031 Exchange into Multifamily

1031 Exchange into Multifamily

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