Using Profits From Sale for 203k Rehab to Defer/Avoid Taxes?

Question

Not sure if this is a 1031 exchange question or better suited for another forum:

If I sell a rental property and, in turn, use the profits from that sale to pay a GC to rehab a 4-unit property I purchased in February and intend to hold (and occupy 1/4th of), is it possible to defer or avoid taxes on the profits from said sale?

For what it's worth, I purchased an REO in February that I am in the middle of a 203k rehab. Whatever I do not use of the escrowed rehab funds at the end of the rehab will be applied to principal of the mortgage. I presume my timing is a little bit off for a 1031 as I would be selling after I purchased - but I am still in the middle of the 203k so I am kind of holding out hope another strategy may be possible. In theory, if I came to the table with said funds, I could have used the 1031 exchange and would have the same result.

Any thoughts about strategies I could employ here? I purposely don't have any deals in the pipeline and so would be sitting on the funds. If I could use them in my current project and avoid taxes, my mortgage would be paid down whatever I didn't use from escrow and it would be, essentially, money in the bank I could cash-out refi later.

Robert Hetsler · Answer

The answer is that if you do it, it would be an uphill battle and that is because the Qualified intermediary would have to have a valid real property ownership. I have seen this done, but you must absolutely have an attorney involved, where it is structured so that the QI has 30 year leasehold interest and rehabs the property as part of that interest and at the end of the rehab or the 180 days, whichever occurs first, the lease is assigned back to you as the property owner.

Again, this is generally a no answer and I would say no as well. I merely just pointed that out because I saw a rather large transaction, involving over a hundred million dollars done. The structure of the transaction was tested with the IRS first in terms of requesting and securing a rev ruling that permitted it but it was a very factually intensive case so unless there is a significant amount of money at issue, I am saying no.

I would be interested to hear if anyone has a different response and, if so, I would welcome the discussion or strategy as I am asked this question, at some level, on a weekly basis.

Sorry Eric, I hope for your sake, I am wrong but I do not think so as there are many reasons this one fails in my opinion.

Eric L. · Answer

That I get and figured as much and it, of course, makes perfect sense. 1031 aside, what about using the funds to pay for part of the rehab I mentioned that is a buy and hold? I understand that the rehab costs are taken during depreciation but is there some sort of way to accelerate that?

Wayne Brooks · Answer

No. The 4 plex was bought in a regular sale, no way to undo that.

Using Profits From Sale for 203k Rehab to Defer/Avoid Taxes?

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