Is a 1031 Exchange my best option im my case???

Question

Hi, I currently have a property that I’ve bought a few years back with my brothers but was financed by just myself (It was easier to get the loan that way). Fast forward to now we have established an LLC and purchased a fixer upper CASH but need to sale the initial house to make the repairs. We might be able to make close to a 100 grand after paying the small leftover mortgage. How do I proceed to avoid the taxes for now? I read about 1031 exchanges but not sure if I can use it to our advantages. If not what else would you suggest? The sale wont happen for a while now so I have time to do all kind of maneuvring to make the right move tax wise at least. Please advise. Thanks

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Dave Foster · Answer

@Edem Dosseh, @Jacqueline Gardiner and @Johnny Rhee, nailed it. the 1031 would be appropriate for you to use but you can't improve property you already own. It must be a new purchase.

However, a musing occurs in my mind. If the LLC you and your brothers formed is a regarded entity and files it's own tax return then it might not be related to you. If you own the property by yourself then it is worth asking an attorney for their read on how related a party you are to the LLC. Usually if you own less than 50% of an entity and it has a different composition than your other property it is not related.

This is important because then you could sell as yourself and use the 1031 to buy the property from the LLC to complete the exchange. The LLC would have to make sure of it's tax situation and it could then take the cash and loan it to you to make the repairs. But this is not a DIY decision. You need to pass it by counsel for their Okey dokey.

Johnny Rhee · Answer

If it's a rental property, you can do a 1031 but I believe it must be used on the purchase of the property not on the repairs. You need to hire on a 1031 exchange accommodator to properly execute the exchange.

Jacqueline Gardiner · Answer

Hi Edem, The fact that it has been a rental and that you’ve owned it for a few years is good. That means that you should be able to do a 1031 exchange. However, you’ll need to purchase another property in order to do the exchange. It will also need to be titled the same as the property that you selling (though it could later be transferred into your LLC). There are a lot of rules that must be followed. However, I think it might be possible for you to buy another property, use additional leverage when purchasing it, and get some of your equity out that could then be used for the improvements that you want to make on the fixer-upper. @Dave Foster is a very knowledgable intermediary who is active on this forum and can probably help you out with some details if that approach is of interest to you.

Jacqueline Gardiner · Answer

Hi Edem, How has the property been used? Is it a rental? It’s important in determining whether you qualify for a 1031 exchange.

Matt K. · Answer

you say make 100k after paying off the mortgage... what is your cost basis for the house? As in how much did you buy it (plus certain costs, but we can skip that to some extent now) vs how much it sales for? Example... if you bought it for 150 and it sales for 175, you'd have 25k to 1031 (which probably isn't worth it). However, if you had so 75k loan, you'd still walk away with 100k (leaving out closing costs etc etc).... but you're not paying tax on all of that.

Edem Dosseh · Answer

@Dave Foster thanks. I'll do my homework and report back on it. Thank you

Edem Dosseh · Answer

@Jacqueline Gardiner yes it was a rental. Thanks for your reply

Is a 1031 Exchange my best option im my case???

Is a 1031 Exchange my best option im my case???

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