1031 prep and surprises?

Question

I own an investment property in Washington DC and am considering putting it on the market and doing a 1031 exchange. What do you wish you had better prepared for or what unexpected issues did you have when selling or buying the property?

I'm likely going to buy in Washington DC, Columbus OH, Chicago, Charleston, or Greenville, SC where I visit frequently or know the area well.

Federico Gutierrez · Answer

You need to contact a 1031 exchange that will act as the third party and keep your money in escrow. You have 45days to identify your next property and 180 days to close. Thats the simple version

Josh B. · Answer

Thanks, everyone for all your constructive feedback! It's probably not helping that I'm currently living in Australia and trying to do this so the 14 hr time difference is killing me a bit.

Lauren Speidel · Answer

@Josh B. - If you enlist the help of a Qualified Intermediary with extensive knowledge and experience handling 1031 Exchange transactions there shouldn't be any "unexpected issues". A Qualified Intermediary should be able to gather information on your specific transaction and provide you with guidance on issues that may arise. It is also very important to speak with your financial advisors regarding your transaction to make sure it financially makes sense to proceed with a 1031 Exchange. There are guidelines in place to successfully complete a 100% tax deferred 1031 Exchange and if you are working with a reputable company then I would expect those guidelines to be discussed so you aren't caught off guard.

If you have a HELOC that is secured to the property, it will be paid off at closing and the debt would need to be replaced.

Dave Foster · Answer

@Josh B., if that heloc is attached to the property you are selling then yes it is paid off at closing.  But it does not create tax free money.  You still have the two fold requirement if you want to defer all tax.  First you must purchase at least as your net sale, and second you must use all of the cash in the next purchase or purchases.  In your case paying off  the heloc in the sale would leave you with less net cash but still with the requirement to purchase at least as much as you sold.

You're right about the time lines.  selling one larger asset and purchasing several smaller ones can create some angst in finding the right replacements.  One thing you could do to prepare would be to list your property and entertain offers with contingencies that give you a floating closing date or place significant earnest money in escrow until you can find and contract your replacements.

It's a sellers market so sellers aren't as likely to give you a contingency to sell your property.  But since its a seller's market you could certainly explore contingencies on that side.

Josh B. · Answer

So basically it's all about hitting those quick deadlines and making sure you've got a few properties ready the day of closing.

Financially, if I have a HELOC in addition to my primary mortgage, is the HELOC paid off tax free under the 1031? I've seen some ambiguity about when that's permissible or not.

Bud Dwyer · Answer

I can only speak for for my own experience.

I did a 1031 from one investment property to another.  The first thing is you're under the gun time wise.  The amount of time seems like a lot, but it takes time to vet properties.  I used up all the time on the exchange, and didn't get a property under contract until the last day.

Then the bombshell hit.  The appraiser had the building at $40k below what I offered.  I felt it was BS and called a desk audit.  The auditor agreed with the initial appraisal.  I then went with a loan broker the seller suggested.  He appraised it at $5k over what I offered and the deal went through.

Only thing was I didn't pay attention to amount he put down.  He only put down the required %25, and I ended up with $15k in boot later on.  Again this was my fault, I just wish I had paid closer attention.

Matt K. · Answer

I'd pick an area that has deals come up often enough you know you'll have a chance of getting, not the one off deal that hardly ever comes up. Once you do that, I'd pick an area (zipcodes/region, etc) and watch it like a hawk to get a feel for what is "normal". This will give you a decent amount of time to work through your list before you hit the 45 day deadline. Once you get a property under contract it's "easy" compared to finding one....

I didn't even know what a 1031 one was when I entered into mine, I found it out by accident more or less. I realize that the buyer was doing one, learned what it was, figured out how to make it work for me. I screwed up because I thought I could make a huge list and learned late that you couldn't. This was my fault for not asking an assuming.... but I was still able to hit the 45 day deadline. I also had zero luck local and had no idea where to go and ended up rushing to pick an out of state market and then an area with in the market. I made it work... but it was a wild and crazy ride.Not sure if you know this or the value of your 1031, but you can replace with a "single" property with of unlimited value, or you can do 3 combos of properties worth up to 200% (double check that). But you have to get all of them in the  combo for it to work. I think you can also bundle multiples into one closing and have it count as 1 for higher value (verify this).

You could also do a reverse 1031...

Joel Owens · Answer

First you need to know what you are going to exchange into and if your expected return for the area is realistic to achieve. Those 45 days go by very fast.

1031 prep and surprises?

Most Popular Reply