First 1031 exchange

9 Replies

I am a passive investor in a apartment deal in Texas and we are in the processes of selling it for a nice profit. I'd like to roll the money from that deal into my own apartment deal using a 1031 exchange however I have some concerns and wanted some feedback. 

First Question, this will be my first multifamily deal (I've done residential and passive multifamily) that I will be running. I'm worried that the constraints of a 1031 exchange will complicate things for a "new" investor. For example being limited to a list of 3 properties may bias me towards taking a bad deal that i should avoid. Is that a valid concern?

Second Question: what happens if the 1031 exchange falls apart? for example what if I can't find a deal in the window of time allowed? Are there any fees? 

Third Question: Can anyone recommend an agent they have used? 

thanks in advance! 


i went through the process recently and learned quite a bit... 

Finding a deal is the hardest part, but you do have a fair bit of time to try it out. For me I struggled to find a deal and to even have offers accepted in the beginning. I finally went out of state.

Which brings up the second part I learned. Don't get tunnel vision when doing the 1031, it's easy to do with the time frames. Keep open mind and remember what your goal is. Also look at the numbers...either they work or they don't.

Lastly, when I identified I put my top 3  choices in order from best to "worse". I had one good deal first and the day I turned in my list it went under contractanct and I lost out on it. My second choice wasn't " perfect" on paper but it works and the savings on taxes helped. My last property was a off market one and was my emergency plan.

If none of them worked out I would of paid a small fee and got my money back and had to pay taxes. No point in taking a "bad" deal just to take it.

There are several things that you can do to minimize the possibility of ending up with a bad deal. The issue is that you have other identification abilities and are not restricted to the three-day method for some reason. Additionally, there are other opportunities I refer to as fail safes which can include DST's and TICs both of which, assuming you align yourself with the correct person or company, will often provide a better rate of return than you can receive yourself. Again, these are some suggestions to alleviate some of the stress you are inserting upon yourself unnecessarily. I do think you have options available to you that will prevent the "worst case scenarios' that you are envisioning are not going to come true if planned out correctly with the right professional.

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Jonathan Norman:

First question:  how are you holding title to the property that you are selling?

Remember, the Replacement Property must go into the same name as the Relinquished Property came out of (some exceptions if LLC involved).

Now is the time to pin that down.

Michael Lantrip.

Originally posted by @Account Closed :

Jonathan Norman:

First question:  how are you holding title to the property that you are selling?

Remember, the Replacement Property must go into the same name as the Relinquished Property came out of (some exceptions if LLC involved).

Now is the time to pin that down.

Michael Lantrip.

Actually that is a good point that I did not even consider. Although I vested in this deal as myself the property is held in an entity that is not mine (its an LP)  so in retrospect I guess can't do a 1031 anyway. 

There might be a way to accomplish the same thing without going into the grey area.  Are the General Partner and the other Limited Partners willing to use the Net Sales Proceeds to purchase a Replacement Property, or do they want to walk away from the closing table with money?

@Johnathan Norman , congratulations on dipping your toes into the 1031 end of the pool.  In your particular situation the LP would have to do the exchange so that the tax payer for the relinquished property can be the same as the tax payer for the replacement property.  There may be some ways working with your accountant to use this to still create a partial 1031 and have partners end up at the end of the day with the taxable cash or tax deferred property that they wish.  But for an LP especially it is difficult. But in your situation as a passive (probably minor%) partner you won't have much success driving the train.

However, when it comes to it and you've to a live 1031 possibility do not be afraid of the time lines.  Instead, use them to motivate you to aggressive action.  You must close the sale before you can close the purchase but you may go into contract on your replacement whenever you want - even before you close the sale.  Use contingencies or whatever means to get control of the replacement as soon as you can.  Close them within days if you want.  There is even a critter called a "reverse exchange" that allows you to full control the replacement property prior to selling the relinquished property (however pricey).

That takes some of the angst out.  Also, you may change that list anytime you want up until midnight on the 45th day.  Maybe @Matt K. was actually at day 45 so he couldn't change his list after.  If he wasn't however, his QI should have let him know that he could change his identifications.

The 1031 starts with the sale and the job of the QI is to shepherd you through that whether you successfully complete or not.  So most QI's will charge you the fee but no penalty or anything if you cannot complete.  But when you stack a tax deductible 700 or 800 exchange fee against possible tax savings it can look pretty attractive to take the chance.

@Dave Foster that's exactly what happened.... I being 2 hrs behind where I was looking decided on 2 properties that were not local to me and a third off market local one. The first one I knew was popular but when I put it on my list according to MLS it wasn't under contract. When my realtor looked it up the next morning it was under contract, the property had gone under verbal contract the same (final) day I had submitted. They wouldn't even accept any backups. It was just some bad luck/ "worst case" scenario that was pretty rare but even so it still worked out in the end. You could even avoid that by using a turnkey service.

Also another side note that I learned you do have 2 options when doing the 1031:
A) any property with no max value
B) 3 combinations of property up to 200% of the 1031 value.

Lastly, this is a little of an over simplification but you do not need to use "all" of the profit in the 1031. You can do a partial and then be taxed on the amount left over (the boot). I've also been told you want to avoid if possible doing a refi because it can be seen by the IRS as attempt to avoid taxes and you could owe on the refi amount. 

@Matt K. .You've actually got three options in regard to your 45 day list.

1. You can name up to 3 properties and it doesn't matter what their aggregate value is.

2. If you want to name 4 or more properties you are ok as long as their agregate value is no more than 200% of the value of what you sold.

3. If you want to name 4 or more properties and their aggregate value is more than 200% of what you sold then you are still OK as long as you close on at least 95% of the total value of the list.

You're right about being able to do a "partial" 1031 exchange.  The IRS requirements are in order to completely defer all tax you much purchase at least as much as you sell and use all of the proceeds from the sale to do so.  But if you want to buy less or take cash you may.  That part becomes taxable.  But can still be a very viable strategy.

As far as doing a refi to get cash out.  What we recommend is that you do not refi immediately prior to the sale that begins the 1031.  That could be construed as an artificial attempt to get at your gain. However, it's perfectly fine to refinance the property to get investing cash immediately after you purchase it.