1031 Advice Needed, Pay tax, Renovation, or Standard 1031???

6 Replies

We have rented our (formerly primary residence) out for the last 7 years.  We did not intend to sell it, but recently found a nice duplex in the path of progress (lots of potential), and have decided to sell the single family and buy the duplex and potentially use a 1031.  The problem is the duplex purchase price is approximately $50k cheaper than the single family.  

Sales price on SFR: $185k after fees (originally purchased for $157k and has a cost basis after depreciation of $135K)

Purchase price on new duplex:  $135k

Boot:  $50k

If we choose an improvement 1031 exchange, I don't think I'd be able to legitimize the $50k expenditure on the $135k duplex.  It's move in ready and would be by far the best house on the block with improvements.   

Or we could purchase an additional house and combine the two to be greater than the $135k. There are small older SFR's around town under $100k.

Or we could pay the tax (I estimate $7500) and move on...   (we are in a 15% cap gains bracket).

Local 1031 firm wants to charge $1500 to set up the exchange.

Any thoughts or advice on the above situation?

If you have $1m of net worth, you could qualify to do do a 1031 into a DST with the boot. That’s one option.

The $1500 for the exchange seems high to me. Talk to @Lauren Speidel for another cost estimate on that.

Hope that helps. Reach out with questions.

@Joshua Wright - Thank you for the mention! @Robert Johnson I'd be happy to discuss your transaction in more detail. Like Josh mentioned, an option for a 1031 exchange, when the replacement property is less than the relinquished property, could be a DST (Delaware Statutory Trust). If you are an accredited investor with $1M net worth, not including your primary residence, you could take the 50K and invest into a DST. This type of investment is provided by real estate companies where you purchase a percentage ownership in a real estate portfolio. Usually these products will range in sector, estimated hold times, leverage amounts, expected returns, etc.. Josh can certainly discuss these products with you in further detail as you must purchase them through a Financial Advisor or Registered Independent Advisor.

In regards to cost, on average, most QIs hover around the $1,000 mark. If you are considering another QI, due to cost, please let me know.

@Robert Johnson , I think you've got a great handle on your situation.  Some thoughts.

1. $50K is probably not going to meet the minimums for most quality DST purchases and I think the above poster selling DSTs missed that you'll be purchasing the duplex. So that's probably a non starter.

2. You're absolutely right about the improvement exchange.  I was leaning that way myself.  but if the property doesn't need it why spend it and have the extra cost of the improvement exchange.

3. So that leaves the option of paying tax on the $50K boot or purchasing another property.  I just hate tax by nature and don't forget you'll also be subject to Ohio tax and the depreciation recapture on the $22K would be at 25%.  So the tax bill might be a little higher than you think.

4. So why not buy a second property.  Sounds like you know the management biz.  That's absolutely fine to satisfy a 1031exchange.  As long as you purchase at least as much as your net sale (185 ish) and use all of the proceeds in the next purchase or purchases you'll avoid all tax.  And you can allocate those proceeds however you want.  You could buy one property for cash and leverage the other.  Or pay cash for both.  Or purchase substantially more than you sell  using leverage on both.

I think you'll be happiest with the results of #4.  Nothing like a little extra project waiting in the wings.

Actually there are plenty of DSTs that are great at $50k. It’s below a usual minimum of $100k, but most quality DST sponsors will work with you. Quality has nothing to do with the minimum, but rather the sponsor.

DSTs are simply a planning tool that could work in this situation. But of course there are plenty of other great options as well.

Thanks all for the feedback, invaluable information.

I’m leaning toward purchasing the second, smaller property. I am confirming financing before moving forward with another property and then securing a intermediary.

What are the rules around selling a 1031’d purchased property? Can I sell after so long and do they treat taxes on that sale? My guess is the IRS will look back and tax any funds transferred as part of the original 1031.

Same goes for refinancing? Any rules of the road there too?

Many thanks!!!!

DSTs mostly have a minimum of $100,000 on a 1031 exchange, you'll need to find a representative with good contacts and relationships with sponsors to get that done as it would be a relationship based decision to deviate from the minimum investment amount. There are some with high debt that do have lower minimums, if you want to go this route you need to speak with an experienced DST rep.