Building my team to do my first 1031

7 Replies

I have been reading, researching, & looking at properties for a few months now, but I need to get serious and start building my team to help me through my first 1031. My property is in SoCal, but I live in Michigan. I know CA has a law that if I reinvest out of state then upon sale of the acquired property I would have to pay the CG taxes on the relinquished property. I’m willing to look in CA, but I’m not sure I can find the same cash flow that I can in other parts of the country. I am looking at small apartment buildings for my new investment. 

To build my team I am thinking I need the following:

- 1031 intermediary

- residential agent to sell current property

- commercial broker to find new property 

- tax accountant (My current CPA is in MI) 

Am I missing anyone? Does it matter where the QI & accountant are based out of? Should I find an area of the country to invest in or find a broker who can find properties that meet my criteria and then decide if that area fits my investing needs?

Any advice or recommendations would be greatly appreciated! If all goes well I may consider doing the same with another Ca property I have that has also appreciated very nicely. 

@Michele G. ,  There's a lot of folks feeling the same tension between appreciation and cash flow with their CA properties that you are.  Looking outside the state can be a good move.   Even in CA though you can still take advantage of the advantages of a 1031 exchange.  Your accountant will inherit the reporting requirements necessary for you to continue your tax deferral once that property leaves the state.  The 1031 is still available to you if you move your property out of state but there are some reporting requirements that your accountant will need to be familiar with although they don't necessarily need to be CA based since so much of your life is outside CA anyway.

Since 1031 is a federal statute followed by the states and since so many transactions start in one state and end in another, you'll want to focus more on QIs with demonstrated experience nationally and get the one on your team that works best with your accounting and legal professionals.  The 1031 is an important piece but it's still a small piece of your overall picture.

Unless you're looking in your backyard you'll want a strong property management team.  And if you're looking in your backyard then you're going to have to find vendors of all kinds who can be go to's from electricians to roofers etc.  

And when looking at commercial brokers you'll maybe want to spend some time differentiating between those who specialize in sales and leasing.  This too can aid you in your search for property management.

@Katie Lepore So I need a Ca CPA and a MI CPA? Or can my MI CPA suffice?

@Lane Kawaoka How did the 1031 negatively affect you? Was it due to what you exchanged the property for? I am looking at exchanging a SFH into a small apartment complex (10-20 units depending on where I find property). From my understanding that would be a like kind exchange. Would my income level have any impact on my exchange?

@Michele G.

If your current MI CPA is familiar with CA laws then stick with him/her. If they are unfamiliar then maybe best to engage a CA-based CPA. 1031 exchanges is federal law so most CPAs should be familiar with it, it’s just the California source income that you need to worry about. Probably a nonresident return. Without knowing your full picture or your CPA’s qualifications I can’t say what you need to file or who you need to talk to but my guess would be you could stick with your MI CPA. Ask them after tomorrow (tax deadline) if he’s comfortable or familiar with your situation.

HI @Michele G. , I'm in the midst of a 1031 and since the market is so hot I strongly suggest you find your replacement property first before closing on sale of current property as the 45 day ID period will fly bye.  Also, I would suggest you get an accountant, Tax, QI and Attorney who all work together or at least can communicate.  While the 1031 is a relatively simple thing there are a lot of little nuances that you (and your team) want to pay attention to so you don't void the 1031.  

BTW, keep in mind there are a certain expenses that are normal to acquiring replacement property that 1031 funds will NOT be eligible for...NOT an Attorney, CPA, etc, Loan Application Fees, Lender's Title, Appraisal Fees, mortgage points and assumption fees, etc.   

Depending on deal, these might not be much. We are in process of acquiring 5 separate properties from 1031 and these items are requiring us to bring six figures in additional equity to closing tables. With that said, we are able to defer a large amount of taxes. BTW, we are doing this with an syndicated LLC.

@Lane Kawaoka , if you don't mind, please elaborate further on, "I did one a few years ago when I traded 2 properties for 9 turnkey rentals and totally regret it. Reason being is that it is not a like kind exchange with LLCs (private placements / syndications)."

Best of luck Michele!

@Michael Anspach Thank you. I am trying to find the properties to identify first. We are looking at a six figure tax bill from the sale of our property if we don’t do this right and on time. That’s why I want to build my team now so I can start the process with all of the players involved. I will add attorney to my team. I know some expenses can’t be covered by the 1031 funds, but I will need to review those. Are you saying the attorney, CPA, etc fees are allowed expenses, but not certain fees related to the closing?

@Katie Lepore I will talk to my CPA later this week or next week.

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