First Time 1031 Exchange First Time Southern California

1031 Exchanges
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First Time 1031 Exchange First Time Southern California

Robin Boyer
Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes

Hello bigger pockets getting ready to do a 1031 exchange in corona California. First time ever for us we are selling a commercial building can use any tips or pointers. Also  what kind of properties should we be looking at right now?? Thank you very much bigger pockets. 

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Priyanshu AdathakkarPro Member
Realtor · Columbus, OH · Member since 2017 · 313 posts · 245 votes
9y

You have not identified any properties yet and you are talking of 1031 exchange?

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  • Priyanshu AdathakkarPro Member
    Realtor · Columbus, OH · Member since 2017 · 313 posts · 245 votes
    9y

    You have not identified any properties yet and you are talking of 1031 exchange?

    1Reply
  • Robin Boyer
    OP
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    Yes please help me. We have never done this before we need to start looking at the properties. Our commercial building won't be on the market for another month. I finally have sean here from BP as  our realtor and a attorney in Riverside working for us on this case .

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  • Leslie Pappas
    Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
    9y

    Hi @Robin Boyer, you mentioned "we", if you're doing an exchange you have to make sure the title in which you acquire the new property is the same as the title for the property you relinquished. Also make sure you use a reputable QI. 

    Some other considerations... do you think the Corona marketplace is at a top?...do you still want to manage property? Do you want or need more cash flow, or is appreciation your main goal? How you answer these questions will take you to your next step.

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  • Jeffre Saint James
    Professional · Baton Rouge, LA · Member since 2015 · 6 posts · 2 votes
    9y

    Robin, if you're still in need of some ideas.  We have a Delaware Statutory Trust that can assist you with this request.  See some of IRS guidelines for this type of exchange.  Best Regards, Elder Jeffre Saint James, D.PSc, MBA - Trustee Saint James Holding and Investment Company Trust.

    Federal/1031 Exchange

    On August 16, 2004, Internal Revenue Bulletin 2004-33 was published in reference to Rev. Rul. 2004-86. This involved a Delaware Statutory Trust that came before the Internal Revenue Service (IRS) and Treasury Department, who offered a ruling on the following two issues:[8][9]

    1. "[H]ow is a Delaware statutory trust, described in Del. Code Ann. title 12, §§ 3801 - 3824, classified for federal tax purposes?"[8][9] "The Delaware statutory trust described above is an investment trust, under § 301.7701-4(c), that will be classified as a trust for federal tax purposes."[8][9]
    2. "[M]ay a taxpayer exchange real property for an interest in a Delaware statutory trust without recognition of gain or loss under § 1031 of the Internal Revenue Code?"[8][9] "A taxpayer may exchange real property for an interest in the Delaware statutory trust described above without recognition of gain or loss under § 1031, if the other requirements of § 1031 are satisfied."[8][9]

    These holdings of the federal government offered a clearer notion that Delaware statutory trusts are legal entities, separate from their trustee(s), offering them limited liability. In addition, Delaware statutory trusts were shown to be considered a trust for federal tax purposes, making them a pass through entity that mitigates taxation for their trustee(s).[8][9] The second holding offers the opinion that real property, being held under a Delaware statutory trust, is eligible to use a 1031 exchange, without the recognition of gain or loss, as long as the following seven restrictions are met:[8][9]

    1. Once the offering is closed, there can be no future contributions to the DST by either current or new beneficiary.
    2. The trustee cannot renegotiate the terms of the existing loans and cannot borrow any new funds from any party unless a loan default exists as a result of a tenant bankruptcy or insolvency.
    3. The trustee cannot reinvest the proceeds from the sale of its real estate.
    4. The trustee is limited to making capital expenditures with respect to the property for normal repair and maintenance, minor nonstructural capital improvements, and those required by law.
    5. Any reserves or cash held between distribution dates can only be invested in short-term debt obligations.
    6. All cash, other than necessary reserves, must be distributed on a current basis.
    7. The trustee cannot enter into new leases, or renegotiate the current leases unless there is a need due to a tenant bankruptcy or insolvency.

    Best Regards, Elder Jeffre Saint James

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  • Robin Boyer
    OP
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    Cash flow and appreciation. I need a qi a worker in this area of taxes and procedures. Yes we will need to manage property. Anyone willing to offer help we can hire thank you pm me for my cell phone. 

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  • Burke Ericson
    Valley Village, CA · Member since 2017 · 34 posts · 13 votes
    9y

    Robin, I am new to this too, but I have been doing research and figuring out a good strategy. In my case I have to exchange 1M in property and the best ROI I can figure is investing in markets with super cheap houses and reasonable rents. I have found some places where I can buy a $100K house and get $1250 a month rent which is a very good ROI. I really suggest you spend time looking on Zillow and learning about the different house to rent ratios in larger cities in the country. This will help you understand how to think about it and find out good places to invest. Also, because I am gonna be closing on 10 or so houses I plan to have the properties professionally managed which is the only way this kind of disposition makes sense IMO.

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  • Burke Ericson
    Valley Village, CA · Member since 2017 · 34 posts · 13 votes
    9y
    Originally posted by @Robin Boyer:

    Cash flow and appreciation. I need a qi a worker in this area of taxes and procedures. Yes we will need to manage property. Anyone willing to offer help we can hire thank you pm me for my cell phone. 

     As far as Cash flow and appreciation. Cash Flow: You might consider doing a partial exchange, this means that upon beginning the exchange you can decide to reserve some of the proceeds from the sale, which is called "boot", a 1031 exchange professional can structure this for you. The only consideration with boot is that you have to pay taxes on that money... From what I have learned this rate in an extreme case can be taxed at $35K for ever $100K reserved in boot. While this is a steep tax, IMO it is better to hold some reserve until you can establish cash flow. If you work this into your overall strategy, you can simply plan to find stronger deals or take risks that you cannot take when you have no reserve. The appreciation of your new property is what it is, it will impact your property taxes, but you can plan to trade up your exchange (an even more expensive, revenue generating property) after a couple years which is part of my strategy at this point.

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  • Robin Boyer
    OP
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    This makes sense to me thank you I will need to show this to the 1031 guy I was just thinking about that today and yesterday I was thinking what do you do when you just have invested all of the sale and no cash on hand. Like you said we need some cash till we get these rents coming in. I am leaning towards the brrrr method and try to collect like 4 to 7k a month in rent.

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  • Curtis Harvey
    Investor · Top of the World · Member since 2016 · 165 posts · 40 votes
    9y

    Robin,

    What is the property that you have now?  What is your real estate strategy?  Identifying your next property or properties is the next step for your.  Once you find it and have a buyer in place for your current property then the rest is easy.  Do you have a company that has done many 1031 exchanges in place.  I would only work with a team of people that have done this before in your area.

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  • Robin Boyer
    OP
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    We are selling a property at 130 industrial way corona California. It has 3 units and a ware house it's pretty big and appraised at s million. So my mom will get half I like the idea of reserving some money for things or repairs to the new properties.

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  • Robin Boyer
    OP
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    Yes next to find is my 1031 expert. I think for us will be best is the buy and hold strategy so we can try to clear some rent checks so we can have money coming in again and can maybe re invest that money?

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  • Robin Boyer
    OP
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    Just  got a email from the attorney with the petition agreement to sign for the sale the 19th of this month.  Dave has been a great help so far we are trying to figure out this whole situation.

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  • Robin Boyer
    OP
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    hello everyone I've been looking at houses meeting lenders realtors everyone. My question is that we are selling a commercial property it's worth about 1 million but there are two owners my mom and uncle. So we may walk away with 400 K or 500k how do we invest in rental property in still meet the requirement of buying equal or greater value? Thank you bigger pockets!

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    Hi @Robin Boyer, 

    You would only have to reinvest your percentage ownership of the real property. So, if the Gross Sale Price is $1,000,000.00, and your mother owns a 50% undivided interest in the property as a tenant-in-common with your uncle, your mother's interest is only $500,000.00. You can subtract routine selling expenses such as real estate agents commission, escrow fees, title insurance charges, recording fees, documentary transfer taxes, 1031 Exchange fees, etc. to arrive at your Net Sale Price. Your Net Sale Price will likely be somewhere between $450,000 and $475,000, which is the amount that you would need to reinvest in one or more replacement property purchases.

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  • Robin Boyer
    OP
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    @Bill Exeter can we give our new tenants a rent to buy option if we wanted? Or we have to wait 3 or 2 years?

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    Hi @Robin Boyer, 

    You can absolutely grant your new tenants a lease/rental agreement with an option to buy the property at a future date. The ability to exercise the option belongs to the tenants, so it is outside of your control.

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
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  • Robin Boyer
    OP
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    @Bill Exeter hope you had a nice 4th of July!  So I am looking at construction exchanges and I would like to buy old houses or properties and possibly buy tiny homes and make tiny home community's locally. If we do a boot with some of the cash can we use that to order our tiny homes? I am just thinking how to pull off a dream! I am very interested in these tiny homes. They are on wheels very nice and take very little space. To me that means more cash flow!

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    Hi @Robin Boyer, 

    Yes, you could certainly pull some cash out at the very beginning or very end of your 1031 Exchange transaction and use to acquire those homes.  They are on wheels, so they are likely not treated as real estate and would require pulling cash out and paying taxes on the taxable boot.  

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
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  • Robin Boyer
    OP
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    @Bill Exeter thanks I have learned a lot the past few days. My property is in the market if you want to talk to shannon at WFG title to start preparing for the exchange. I'll be down in San Diego this week.  Can we sell our next properties if we want to flip them? Not the rent to own just straight sell them after fixing?

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    Hi @Robin Boyer, 

    I will send you an email regarding getting started.  

    Properties acquired with the intent to rehab and then sell of "flip" do not qualify for 1031 exchange treatment.  They are treated as property held for sale in your real estate business and not as property held for investment as required for 1031 Exchange treatment.  

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  • Thomas RutkowskiPro Member
    Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
    9y

    @Robin Boyer - After reading through this thread it seems to me that you should consider a Monetized Installment Sale as an alternative to a 1031 Exchange. Your primary concern seems to be what you want to do with the sales proceeds and that is being constrained by the requirements of your 1031 Exchange.

    A Monetized Installment Sale will allow you to get cash at closing and still get 30 years of tax deferral. You can find new investments (anything, not just "like-kind") on your own schedule, not the firm 45/180 day requirements under 1031.

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    Hi @Thomas Rutkowski, 

    The problem with these types of structures is that they actually trigger the gain but allow you to defer it pursuant to Section 453 of the Internal Revenue Code (although the IRS has not issued any kind of ruling that I'm aware of, so there would be risk with these structures).  And, because there has been a sale of the underlying asset, which is now an installment note, there would be no step-up in cost basis upon death of the investor.  They are not ideal for the investor who wants to remain invested in real estate, and until the IRS provides us with some specific guidance directly on point, it is buyer beware. 

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  • Thomas RutkowskiPro Member
    Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
    9y

    @Bill Exeter - I'm not sure what you mean by "trigger the gain". There is no tax due until there is constructive receipt of the sales proceeds. The reason a 1031 exchange works is that the seller never has constructive receipt. The sale proceeds are held by the intermediary so the seller never has constructive receipt. 

    In a 30-year, interest-only installment sale, there is no constructive receipt until the last and final payment is received. That is the year that the taxes are due.

    I disagree that a monetized installment sale is not ideal for someone who wants to remain in real estate. The advantage of a monetized installment sale for a seller is that even if they choose to get back into real estate, they get to start over with an entirely new cost basis and new depreciation schedule. Depreciation is what it is all about. The seller walks away from the closing with cash in their bank account and the luxury to take their time and find a replacement property on their own schedule without having to worry about the 1031 exchange deadlines. Even better, they can sit on the sidelines during hot markets when good deals are hard to find.

    Data also show that people doing 1031 exchanges pay a significant premium because it has to be disclosed to the seller and the sellers know you don't have the luxury of time.

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    @Thomas Rutkowski

    I did not say the taxes were due.  I said the taxes were triggered.  Sales structured under Section 453 trigger the taxes, but allow the taxpayer to defer them over the note term (30 years in your case).  Sales structured under Section 1031 do not trigger the taxes, but defers them.  There is a huge difference. 

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  • Thomas RutkowskiPro Member
    Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
    9y

    @Bill Exeter - I still don't know what you mean by "triggered". Whether it is a 1031 exchange or a 453 installment sale, there is no tax due until there is constructive receipt of the sales proceeds. That is what "triggers" the taxes.

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