Can I buy a 1031 property BEFORE I sell the other property?

Question

I have a parcel that has a house plus some adjacent vacant land that I have owned less than a year. I subdivided and now have separate offers on the house and on the residual vacant land. The sale of the vacant land is less money, is a cash offer, and will close sooner than the sale of the house. The house is more money and will retain the original address and mortgage. I won't pay off the mortgage and realize a profit until the sale of the house closes.

However, the sale of the vacant land will free up enough cash for a 1031 exchange. I have already identified a property and am eager to get it under contract.

If I purchase a 1031 property BEFORE the previous property is sold, is it still a 1031 exchange?

However, the sale of the vacant land will free up enough cash for a 1031 exchange.  I have already identified a property and am eager to get it under contract.

If I purchase a 1031 property BEFORE the previous property is sold, is it still a 1031 exchange?

Dave Foster · Answer

@Kory Thaut and @Pearce G., , it is perfectly fine to go into contract on your new property before you close the sale of your old property.  But the statutory order of a 1031 exchange requires that you close the sale before taking title to the new.  And don't forget that it's not a diy.  You must use a qualified intermediary.  You can't just sell and buy.

The process referred to above, a  reverse exchange, does not change the order of a 1031 exchange. Instead your QI takes title to the new property in an entity know as the Exchange Accommodating Title holder.  The EAT holds title until you sell your old property. Then you sell the old property, starting a 1031 exchange that completes with taking title to the property held by the EAT.  It is quite a bit more complex than a straight exchange but your QI guides

Where Pearce may have issues is in establishing intent that qualifies for 1031 treatment.  You have a  couple of challenges in your scenario.  First you have not held it very long and secondly, your activity looks very similar to that of a developer which could mean that your intent would be perceived to be creating inventory rather than holding for productive use. In order to qualify for 1031 your intent in purchasing the old property must be to hold it for productive use.  And while there's no statutory holding period the longer is usually better and especially when you end up doing activities that make it look like you meant to do that from the beginning.  Tough to establish that intent as a 1031.  It looks like you meant to sell that parcel from the beginning.  If that is not the case then you and your professionals will want to have a paper trail ready that demonstrates your intent to hold that parcel and then your change of intent (the change that caused you to subdivide and sell part). There are legitimate reasons but you want to be ready to answer the question.

Wayne Brooks · Answer

@Bill Exeter Can speak to the reverse 1031, and more importantly the issue of it qualifies....held less than a year, subdivided, and sold off separately.

Mark Creason · Answer

Kory,

You do need the QI in place before you close on your purchase.  By the way, Dave is sharp on the 1031 process.  I would strongly recommend him.

Mark

Pearce G. · Answer

Update:  The property I was targeting is no longer available, so no urgency and no need for a reverse 1031 anymore.

But thanks for all the great advice, and feel free to continue the discussion for the benefit of others.

Dave Foster · Answer

@Eric C. The greatest challenge to get on going is the lending needed.  You can't use a non-portfolio lender.  It will need to be a portfolio bank or some type of private lender who will lend to a 3rd party unseasoned LLC non-recourse but guaranteed by a non-member of the LLC  not on title. Other than that the complexity of a reverse make it imperative that you get a QI on board who's got a bunch under their belt  The structure to make them work is so key and unique to every situation.

More expensive yes.  But a great deal of the expense depends on the structure needed.  I've had them from $3K - $40K. So while it's hard to give too close a range as a rule, you can probably get a simple one for less than $5K.  Worth it or not depends on the profit you're sheltering.

Eric C. · Answer

Isn't the cost of a reverse 1031 substantially more (something 10x more)?  Besides the cost, are there any other issues potential issues when doing a reverse 1031 vs. standard 1031?

Kory Thaut · Answer

@Dave Foster thank you for the additional information - Quick fllwp question.

In my scenario, I am buying a 4plex that will need to close in February (want it under contract before it's gone).  I'll be selling an SFR that will close in May.  My plan is to reverse 1031 the SFR gains into the 4plex.  However, it's my understanding I can't just purchase the 4plex now as I normally would, I need the intermediary in place at time of the 4plex offer / purchase, right?

Thanks!

Ian Berg · Answer

Dave gives you some good advice on qualification. You could do a reverse exchange (cost more) or you could just get the place you want to buy under contract contigent on the parcel closing. Much easier than a reverse exchange.

Kory Thaut · Answer

@Pearce G. I am working on the same type of thing... I am working to buy a 4plex before I sell one of my SFR and harvest the equity with the intent to 1031 the gains from the SFR into the 4plex.  The 4plex will need to close before the sale of the SFR.  It's called a reverse 1031 and I am in the very early stages.  The part that is giving me pause is the need to establish everything as a 1031 transaction before I eve make an offer on the 4plex.  I am very early in this process so hopefully someone with more knowledge on the topic can weigh in.

Good luck!

Can I buy a 1031 property BEFORE I sell the other property?

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