first time doing 1031 exchange

13 Replies

Hey guys!

I am getting pre-qualified for a loan, we are planning to do a 1031 exchange.

The realtor referred me to 3 lenders, 2 of which never done 1031 exchanges. Does the loan officer need to be knowledgeable about 1031 or is it not necessary?



@Edita D. , There's nothing a lender needs differently in a 1031 exchange.  They will source your downpayment through your qualified intermediary and exchange account.  And of course they can't be writing you a loan that requires you live in the property (unless it's a multifamily or such).

If the lenders are giving you blank looks, your QI can easily guide them through the 1031 process.  Most lenders love 1031s because the downpayment funds are locked up and the borrower can't touch them.

Thanks Dave!

We sold our 4-unit property for 905k ( bought it in 2011 for 475k). Now we want to buy two buildings, each 4-units, for total of 900k using money from the recent sale.

Does the lender need to issue 2 separate loans for 2 separate buildings?

@Edita D. That's really going to be a lender and loan product specific question.  But from the 1031 perspective it doesn't matter except if you can do the replacement as one closing you generally save a couple of bucks on the exchange.  Also keep in the back of your mind that you can allocate the cash proceeds in anyway you want in the two loans.  So if you wanted to minimize leverage on one and maximize leverage on the other that is perfectly fine.

Now I've been hearing lots of people doing 1030 Exchanges now, in order to do this as a flipper do you need to have a property lined up to buy as soon as you sell your previous property? Is the 1030 exchange a good method for flippers to defer taxes? Someone please inform me a little bit, I talked to my CPA about it and he said you have to  have another property lined up to buy as soon as you close the previous one you sold. (by as soon, he probably means in the very near future)

Hi @Mateusz Prawdzik , The problem flippers have with 1031 exchanges is not the identification of the new property.  It is that in order to be eligible for a 1031 exchange the property you are selling must have been purchased with the intent to hold for productive use.

As a flipper you buy property primarily to resell not to hold.  That changes the nature of that property from investment to inventory.  As such it is not eligible for a 1031. 

The rule your CPA is referring to is that when you do a 1031 exchange you have 45 days from the date of the closing of your sale to produce a list of potential replacement properties.  You have total of 180 days to complete the process but your replacement must be on your 45 day list.  And the 45 day list cannot be modified after day 45.

@Dave Foster Thanks A lot that brings lots of clarity. Okay, so as a flipper, I need to have a list of properties within 45 days of close that are potential purchases. And then 185 days to close on one of those properties, now with this being said. IF there is a list, can I use a 1031 exchange on multiple properties or does it only have to be one? Also, how does the account "file" this list? Is there like another special form that he sends out or something that states "this are the next potential leads Mateusz Prawdzik might be closing on using a 1031 exchange?" When it comes to taxes, I am just quite lost even though I am learning every day more and more. Being single, 18 years old, no dependents, no mortgage, only running a business, and making quite a bit a dough, you can see where I am coming from with this deferring stuff. hahaha 

@Mateusz Prawdzik , As a flipper you cannot do 1031 exchanges.  flippers buy property primarily to resell it.  

You can only 1031 exchange property  you buy with the intent to hold for productive use.

If you have a property that you want to sell that you have purchased as a buy and hold property you can 1031 that.  And you're right there are several rules that you've got to follow.  

Tell you what, the easiest way to deal with all of them (which would vastly overwhelm the purpose of this forum) is for me to reach out via pm and I'll send a primer to you that gives you a good road map of the 1031 process and how to do it effectively and legally.

I applaud your drive.  You're going to go far.

Hi @Edita D. ,

The vast majority of the lenders do not really understand the technical aspects of a 1031 Exchange transaction. They don't need to do anything differently or really understand the 1031 Exchange if you are structuring a standard Forward 1031 Exchange transaction. The lender really just needs to do what they generally do in order to underwrite a loan for rental, investment or business use property.

We often jump on a conference call in order to help walk the lender through the 1031 Exchange process, and to provide them with assurances that the 1031 Exchange transaction will not affect their underwriting. We as Qualified Intermediaries can also provide your lender with a verification of deposit once we are holding the net proceeds from the sale of your relinquished property.

Hi @Edita D. ,

You can certainly sell one relinquished property and then subsequently acquire to replacement properties as part of the same 1031 Exchange transaction. The financing for the two replacement properties can be separate loans or a blanket loan. It does not really matter from a 1031 Exchange perspective.

Hi @Mateusz Prawdzik ,

Unfortunately, properties acquired specifically with the intent to fix/rehab and then sell as quickly as possible, often referred to as flipping, do not technically qualify for 1031 Exchange treatment. These properties are actually held for sale in a real estate business (e.g., inventory in a real estate business) and not held for rental, investment or business use as is required for 1031 Exchange treatment. 

The critical element is your intent to acquire and hold properties for rental, investment or business use as opposed to acquiring properties to rehab and then sell. You would likely qualify if you acquire property, rehab the property and then hold the property for rental or investment purposes. Advisors often recommend a minimum holding period of 12, 18 or 24 months, but the real critical issue is your intent to hold versus intent to sell.

@Dave Foster Hi Dave, if I have a duplex in NYC with significant equity, and I want 1031x into a larger multi-family- do I need to exchange all of my sale proceeds or equity? Or can I "withdraw" 100K and deposit into my bank, and 1031 the rest? 

If the duplex above is held TIC with my sister(personally held), does the new property need titling to be the same or could be a LLC with 2 of us be members?

What do I need to watch out for if I want to do a reverse 1031? 

Also, can I 1031 1 duplex into 3 or 4 single families  in another state  -spread it out evenly? What type of fees do you charge? Thanks in advance for your advice. 

@Alan Zee , Whew!  That's a whole bunch of question.  Let's see if I can tackle the short version without putting everyone to sleep

1. If you want to defer all tax you need to purchase at least as much as you sell and use all of the proceeds in the new property.  But you can purchase less and pull cash out.  Whatever you do is taxable.  It's called a partial exchange.  Used all the time to take some fun money off the table but still benefit from the 1031.

2. If you and your sister want to continue forward together you'll need to take title again as TIC. However, since you now own as TIC you can do a 1031 with your % and she could do a different 1031 with her %. Or she could take cash and you do an exchange. TIC is mix n match. Once you complete the exchange then you could contribute the property into an LLC with the two of you as members. That would be fine but has some other considerations.

3. The reverse exchange is really best in the following circumstances.

     1. You find the perfect property that you have to purchase before your old property sells.

     2. The new property you want needs improvements and the purchase price without the improvements isn't as much as you are selling.

     3. You found the perfect building spot but need to complete a structure before the value of the new property will cover a 1031 reinvestment requirements.

     4. You're in an extreme sellers market and are worried about finding your next property.

The reverse is a whole volume of explanation animal.  But the three biggest issues are cost (make sure you're sheltering more than $30 - $50K of profit to make one worth while).   Financing - you have to provide the financing for the QI to take title.  So it's not a conventional product.  A portfolio bank, private lender, or personal cash reserves for the interim are best.  And timing - you only have 180 days from the day we take title to complete the sale of the old property and the reverse.

     5. This is what you call a diversification exchange.  Very powerful and common strategy.  Sell one large asset and buy several smaller assets maybe even adding leverage to increase cash flow.  Yes it absolutely can be done.  You can allocate your proceeds any way you want.  Purchase one or two for cash and use maximum leverage for the others.  That is the best way to recession proof your portfolio - separating debt and cash.  I call it "defensive investing".  Great plan.

Here's an article we wrote for BP on typical costs for a QI -  We're at the low to mid area of this range.  Happy to reach out via pm to chat more.

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