Desperate need of some 1031 Tax Exchange Ideas

1031 Exchanges
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Desperate need of some 1031 Tax Exchange Ideas

Stephen Dickey
Investor · Charlotte, NC · Member since 2014 · 80 posts · 45 votes

Hello!

My business had a recent shift of direction and strategy for our company, and it will involve us selling all four single family properties we own. I am wanting to transition into multifamily, and doing so will allow us to gain the needed capital to get involved. Here is my dilemma, and I would love some advice/feedback as the best way to go about this. From my understanding of a 1031 tax exchange, we are able to sell real estate, put the gains with an intermediary, and use the money to purchase a "like-kind" exchange of something equal or greater value, and we can defer the taxes on the sale. From there, there are other stipulations that must be followed. We have 45 days to identify properties we are interested in, then a 180 day window for closing. 

First thing, unless we get extremely lucky, we will not sell all four houses at the same time, definitely not within the time frame the IRS requires. Secondly, the four properties will all sell at different values, which will mess up the 'like-kind' situation. With that being said, we are wanting to combine our gains of all four properties into one 1031 tax exchange to put a down payment on a multifamily property. 

On paper, with the IRS stipulations, this sounds as if it will not work and we will have to shoulder the tax bill, which will cut into our available capital... Is there any way to combine these funds into one 1031 to move forward with our plan and defer taxes? Has anyone ever encountered a similar situation? If so, how did you maneuver it? Are there any loopholes I could take advantage of? If all four properties sale within one of the time periods, could we take advantage of that? Is there anything I am missing with this situation? 

I plan on contacting my attorney to get legal advice as to how to approach this, but I wanted to reach out to the community to get some advice on this situation. There maybe someone who figured out a way to make this happen.

Any thoughts/ideas/suggestions would be greatly appreciated. Thank you very much.

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Eric Sung
Real Estate Agent · Forest Hills, NY · Member since 2017 · 2 posts · 2 votes
9y

I am currently gearing up to go through a 1031 exchange with my family property as well. I don't know much to be able to help, BUT one thing I would suggest is to re-look at your time frame once you sell one of your properties. You said you have 45 days to id properties then 180 day to close. I am pretty sure this is incorrect. You have 180 days TOTAL from closing on your property to close on a new one. But you must ID properties within your 1st 45 days. so its not 45 days PLUS 180s. I am almost positive its 45 days to ID, then 135 days to close for a total of 180 days. 

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  • Drew Reynolds
    Austin, TX · Member since 2016 · 70 posts · 42 votes
    9y

    I'll PM you.

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Stephen Dickey, Most of what you're wanting to do is achievable.  Taking several properties and selling them with 1031 exchanges and using the proceeds to purchase one larger property is a common practice called a consolidation exchange.  I think you've rightly identified that the timing is specific and tricky but it can be done.

    A couple easy ideas to overcome the timing obstacles.

    1. get contracts on your properties contingent on you finding the right replacement.  

    2. get a contract for a large replacement with an extended closing date or contingency.  You may even find a seller willing to sell you increasing tic interests in a property as each of your properties sell.

    3.  You could also pursue a reverse exchange if the size of your gain warrants it.  

    You've got more options than you even realize but you're wise to get a handle on the overall picture of a 1031 and then explore how it can benefit you.

    The 1031 Investor5137 Reviews
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    1Reply
  • Brian Pfaehler
    Investor · Trafalgar, IN · Member since 2016 · 95 posts · 58 votes
    9y
    Great question! I'm actually looking to sell one and the build a new one as the exchange.....I think this can be done as well.
    1Reply
  • Eric Sung
    Real Estate Agent · Forest Hills, NY · Member since 2017 · 2 posts · 2 votes
    9y

    I am currently gearing up to go through a 1031 exchange with my family property as well. I don't know much to be able to help, BUT one thing I would suggest is to re-look at your time frame once you sell one of your properties. You said you have 45 days to id properties then 180 day to close. I am pretty sure this is incorrect. You have 180 days TOTAL from closing on your property to close on a new one. But you must ID properties within your 1st 45 days. so its not 45 days PLUS 180s. I am almost positive its 45 days to ID, then 135 days to close for a total of 180 days. 

    2Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    Exactly right @Eric Sung

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Jad Boudiab
    Real Estate Broker · Cleveland, OH · Member since 2015 · 255 posts · 248 votes
    9y
    Stephen, I don't know your exact market and what returns one could expect, but the best way to get around the timing hurdle is to sell the 4 SFR's as a package. You'll have all 4 under contract and sold at the same time, allowing you to move forward and get into multifamily. Where are you looking in terms of multifamily? I've been able to help many clients 1031 out of SFR's and duplexes in CA, NY, and other high priced areas into a 50+ unit for as little as $400k down in my market, and find 8-11% COCR.
    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Brian Pfaehler, Yes, you're looking at what is called a "reverse exchange".  The statutory order of a 1031 is a sale followed by a purchase. of investment real estate.  You can't exchange into something you already own and you can't exchange into construction on real estate you already own without a different approach.

    In a reverse exchange the qualified intermediary forms a holding entity called the EAT (exchange accommodating title holder).  This EAT takes title to the lot you want to build on.  The property is under your control but you're not on title yet.  Then you construct the building on that property. Then you complete your sale if it hasn't already and you "purchase" the lot and building owned by the EAT for exactly what was paid/spent on it.  By doing this you were able to maintain the integrity of your exchange and also purchase the exact right replacement property.

    Example - If you're going to sell a $300K building and want to build on a $100K lot you really like, you could do a reverse exchange.  Have the eat purchase the lot for $100K.  Then you spend $200K to build the building.  Now the property is worth $300K and you can use the proceeds from your $300K sale to purchase an investment property worth $300K - Exchange complete!

    Timing, complexity, financing, and cost are all the issues you've got to wade through.  But reverses can be a pretty powerful tool to get you right where you want to be.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    2Reply
  • Tom Ott
    Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes
    9y
    Originally posted by @Stephen Dickey:

    Hello!

    My business had a recent shift of direction and strategy for our company, and it will involve us selling all four single family properties we own. I am wanting to transition into multifamily, and doing so will allow us to gain the needed capital to get involved. Here is my dilemma, and I would love some advice/feedback as the best way to go about this. From my understanding of a 1031 tax exchange, we are able to sell real estate, put the gains with an intermediary, and use the money to purchase a "like-kind" exchange of something equal or greater value, and we can defer the taxes on the sale. From there, there are other stipulations that must be followed. We have 45 days to identify properties we are interested in, then a 180 day window for closing. 

    First thing, unless we get extremely lucky, we will not sell all four houses at the same time, definitely not within the time frame the IRS requires. Secondly, the four properties will all sell at different values, which will mess up the 'like-kind' situation. With that being said, we are wanting to combine our gains of all four properties into one 1031 tax exchange to put a down payment on a multifamily property. 

    On paper, with the IRS stipulations, this sounds as if it will not work and we will have to shoulder the tax bill, which will cut into our available capital... Is there any way to combine these funds into one 1031 to move forward with our plan and defer taxes? Has anyone ever encountered a similar situation? If so, how did you maneuver it? Are there any loopholes I could take advantage of? If all four properties sale within one of the time periods, could we take advantage of that? Is there anything I am missing with this situation? 

    I plan on contacting my attorney to get legal advice as to how to approach this, but I wanted to reach out to the community to get some advice on this situation. There maybe someone who figured out a way to make this happen.

    Any thoughts/ideas/suggestions would be greatly appreciated. Thank you very much.

     Use it to invest in a bunch of turnkey properties that do not need work.

    0Reply
  • Orrin Barrow
    Redondo Beach, CA · Member since 2017 · 9 posts · 0 votes
    8y

    "Like-Kind" simply means exchanging investment property for another investment property. You can exchange your single-family rental home for a larger multifamily property as both are considered like kind. If you qualify for and utilize a Delaware Statutory Trust (DST) then you will be able to have access to institutional quality real estate from the proceeds of your 1031 exchange. Your situation is typical of many 1031 exchange investors.

    0Reply
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