Building my team to do my first 1031

1031 Exchanges
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Building my team to do my first 1031

Michele G.
Ann Arbor, MI · Member since 2017 · 109 posts · 52 votes

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. 

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y

@Lane Kawaoka, It's kind of irresponsible to call certain actions that are codified, regulated and practiced thousands of times a year under specific IRS guidance tax evasion!

For full disclosure I am an intermediary for 1031 exchanges.  But I have also used them myself and will continue to do so.  And  I'm OK if you don't like them.    But to call it tax evasion is false and reckless and exposes a lack of understanding of the specific statutes and subsequent decades of case law in sec 1031, Rev procedure 2000-37 (the safe harbor reverse exchange), rev procedure 2002-22 (Tenants in Common syndications), Rev procedure 2004-33 and 86 (Delaware statutory trust), and all of the various regulatory guidances we have for using 1031 exchanges in conjunction with personal property, vacation property, primary residences, retirement, and estate planning etc.

The 1031 has for many decades been the  method of deferring tax on the sale of investment real estate.  And while it is indeed  at face level only indefinite deferral.  To simply stop there is a very shallow look at the impact that the statute has had on real estate investing over the decades.  There are several methods used by wealthy and regular folk alike to use those deferred dollars to generate tax free income and then pass assets to heirs tax free.  

And quite frankly as someone with children and hopefully grand children and causes I want to support with a legacy after I'm gone -  these are strategies I encourage in my own behavior and other as opposed to a philosophy of "who dies with the most toys wins".  Not to mention that the tax free income through my lifetime is awfully sweet.

Whether a 1031 exchange is right for an individual or not should be made by specific situational analysis not blanket like or dislike. 

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  • Ishmael Carter
    Rental Property Investor · New York Ciry, NY · Member since 2015 · 33 posts · 14 votes
    8y

    I have a 1031 Exchange related question . Is the capital gains calculated on the gross income (difference between purchase price and selling price) or are you allow to deduct some expenses such as rehab cost, etc. 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Ishmael Carter,   Capital gains is calculated as the difference between your adjusted cost basis and the net selling price.

    Adjusted cost basis is determined by taking your initial cost of acquisition and adding to that any capital improvements you've made over time.  Then subtract the depreciation that you have taken or could have been taken.  This number is then subtracted from the net sales price (contract price less the costs of closing and commissions but before mortgage payoff).

    This gain number is broken into the profit which is probably taxed at capital gain rate if you've owned it for more than a year, and depreciation which must be recaptured at 25%.

    But this gain is handled slightly different when you do a 1031 exchange.  In order to defer all tax you must do two things

    1. Purchase at least as much real estate as your net sale.  and

    2. Use all of the proceeds at the end of the sale in the next purchase.

    If you take cash out or if you purchase less than what you sold the IRS interprets that you have taken profit out and you pay tax on the difference while not jeopardizing the rest of your exchange.

    So while it is a very good thing to know your profit situation, in a 1031 it doesn't affect your requirements. Regardless of profit or capital improvements you still much purchase at least as much as you sell and use all of the proceeds if you want to avoid all tax.

    The 1031 Investor5137 Reviews
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Ishmael Carter, Any good QI with a national foot print can take care of you.  Location is irrelevant because 1031 is a federal statute that applies to all 50 states.  There are a few states with different little nuances but they all follow 1031 for federal tax deferral.

    And yes, you can sell one property and purchase multiple properties using your proceeds as down payments.  As long as you purchase at least as much as you sell and use all of the proceeds (in any way you want) you will avoid all tax.

    I'll send you a private PM introduction as well if you don't mind.

    The 1031 Investor5137 Reviews
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  • Ishmael Carter
    Rental Property Investor · New York Ciry, NY · Member since 2015 · 33 posts · 14 votes
    8y

    Dave, that was very helpful. Thank you. I'll look to follow up offline. 

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