I have an investment property in Raleigh, NC (that used to be my primary residence). It turned into an investment property when my job took me out of state, it was not initially purchased as an investment property. Initially I thought it was a "good" investment property (i.e. the rent is more than the mortgage payment), but recently I've learned that I'm pretty much making $0.00/ month (rent minus mortgage, PM fees, taxes/ insurance, HOA, CapEx, vacancy, etc.). So I want to "swap" this property for a more cash flow positive property. The market in Raleigh is hot now so I think now is a good time to sell. My series of questions start here:
a) Is 1031 even appropriate here? I know that 1031 is intended for investment properties, since I used to live there can I count it more as "live in flip" and not pay capital gains on the appreciation? (appreciation is about $30-35k)
b) Can I use a 1031 to "swap" my one property for 2 new properties? (my goal with this strategy would be to get 2 properties generating more cash flow for about the same debt level I currently have, using my equity/ appreciation for a down payment on the 2 new properties.)
c) I think I've heard that the new property need to be more expensive than the one you are getting out of. Is this true?
d) If the property (ies) I'm looking at are foreclosures is that advisable? (I know there is a limited window which the new property must be under contract and foreclosures can by a headache)
Thanks in advance for your advice.
@Nathan McQueen - If you have lived in the property 2 out of the past 5 years, you can sell the property and avoid capital gains tax on it up to $250k I believe. Go back and find the exact dates, if you qualify, this could be the best situation. I would also check with an accountant to see what you have depreciated and what needs to be recaptured if you sell. Also check with your account to see if any of the new tax changes for 2018 will affect this process.
Yes you can swap one for two, just the debt level needs to be the same or greater. I swapped one for three. I had enough of a gain and principal paydown on that one to use for a healthy downpayment on three new properties. If you decide to go the 1031 route, call Investor Title in Chapel Hill, NC. They did my 1031 in 2016. They were very helpful and can give you all the details of what you can do.
A. If you meet the residency requirements of living there 2 out of the 5 years prior to sale then yes you can sell and take that gain tax free. If your residency was less than that but you qualify for one of the exemptions you can access a proration. You may some small depreciation recapture.
B. Since it is being used as an investment property you could do a 1031 exchange if it doesn't qualify for the primary residence. As long as you purchase at least as much as you sell and use all of the proceeds in the process you will defer all tax and can purchase multiple replacements. There are some quirks with how you identify the potential replacements during the process.
C. Yes if you want to defer all tax. You can buy less than what you sell but you will pay tax on the difference.
D. Foreclosures can work but the calendar requirements for identification and completion can make it difficult. Your identification period is 45 days. You have an additional 135 days after that to close. You don't have to have the new properties under contract during that time - only identified. But I'd highly recommend getting them under contract during that time because after day 45 your list cannot be changed and only properties on the list qualify to complete the exchange.
@Andrew Kerr thanks for the info and tips on some local connections to help with this.
@Dave Foster great info as well.
Unfortunately I only lived there about a year, so I don't meet the residency requirements. If I've taken depreciation on it in past years would that be recognized in a positive or negative way for me when I sell/ exchange? Next question, what happens if I identify a property (REO property) within 45 days, and the bank doesn't accept my offer? I'm basically stuck and have to then offer more or accept that I'm going to get screwed and pay the tax/ capital gains...?
You can identify 3 replacement properties regardless of their value. You can purchase any, all or none of them. If you want to identify more than 3 properties, the aggregate value of those potential replacement properties cannot exceed 200% of the FMV of the relinquished property (ie the property you sell). Going one step further, you can identify more than three properties with a total value that is more than 200% of the value of the relinquished property if you acquire at least 95% of the value of the properties that you identified as replacement property.
Investors Title Exchange Corporation in Chapel Hill, a sister company to Investors Title Insurance Company, is a great option. Ask for Carol Hayden. She is one of the most knowledgeable 1031 gurus in North Carolina.
I did a 1031 exchange last fall and also recommend Investors Title Exchange Corporation in Chapel Hill. I worked with Riza Abraham, and she was very helpful and knowledgeable. I swapped one property for three and had replacement properties under contract within 45 days. I agree with Dave Foster that purchasing a foreclosure as a replacement property would be difficult given the calendar requirements. I highly recommend you talk with an accountant before moving forward as he/she can best assess your individual tax situation.
@Nathan McQueen , I see I've got a pm from you so I'll take a look at that. But for the good of the group here's a couple responses to some things that have popped up in this thread.
1. 121 primary residence exclusion - There is an exception to the 2/5 rule if your move was related to a job transfer out of area. If you lived in it for one year then your maximum is cut in half. But you could still exempt $125K ($250K if married). That may cover you.
2. By the end of day 45 you must have a list of potential properties that cannot be changed after day 45. @David Miller is just about spot on in his description of the 45 day list. Except the value used to determine 200% is the actual net sales price of the relinquished property not the FMV. So you're right, if you've got one property on your list and it's past day 45 you are stuck with only that property as your potential replacement. So you could offer more or let the exchange die and pay the tax.
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