1031 Exchange - Locking Up Replacement Property Before Selling Existing Rental

[Tim Porsche]

Hey All,

I have a plan to do a 1031 exchange a little differently than the traditional method and am looking for someone more knowledgeable than I am on this to let me know if it is doable or not. I have a 3/1.5 SFH that I bought back in 2019 as a BRRRR. Paid $75,000 for it, put $30,000 in rehab into it, refinanced and rented it, and now it's worth around $230,000 conservatively with $105,000 left on the mortgage. It's currently only earning around $2,000 - $4,000 per year in positive cashflow though, and I'd like to sell it with a 1031 exchange to get that equity out tax free and redeploy it into a stronger cash flowing multi unit property. The current tenants are interested in buying it and pre-qualified for a mortgage, so my hope is to be able to sell it directly to them without paying a lot of realtor commissions if possible.

My question is, instead of doing the traditional 1031 exchange method where you sell the old rental property, then identify 3 possible replacement properties, could I do it this way instead?

1. Start looking for a new multi-unit rental property. Once I find one I like, get it under contract with a 60 - 90 day timeline until closing.

2. Assuming my tenants and I agree on a price (would work this out with them before making offers on potential replacement properties), right after the replacement property goes under contract I would start the wheels moving to sell the existing rental to my tenants and close hopefully within 30 days. During this time I would also start the 1031 exchange and identify the replacement property I have under contract.

3. Existing rental sells, closing on the new rental takes place and 1031 exchange is completed.

I've never done this before and don't know if it is possible though, what potential issues there may be, things to watch out for, etc. Would love to hear thoughts and any tips from those who are more knowledgeable on this. Thanks in advance