How do I use a 1031 exchange to get out of a SFH?

Question

How do I use a 1031 exchange to get out of a SFH that is non-cash flowing?

The home is in El Paso, TX, was turn-key new construction and has been a rental property since 2012.

It has a tenant but after prop mgmt fees, taxes, misc costs, I lose approximately $200 monthly. The neighborhood is nice but it’s the smallest home on the block surrounded by larger homes (1550 sq ft, 4 bdrms/2bath/single story).

Nice home. I’ve listed it on MLS a few times over the years but it doesn’t sell mostly because it’s surrounded by homes over 1800 sqft and due to continuous building of new construction homes nearby. El Paso keeps growing but this home won’t sell so I just lease it out.

I’ve replaced the stove, dishwasher, various repairs over the years whenever the prop mgr says the house needs something since I never want to be a slum landlord. I am still active duty in the military and don’t get back to El Paso much nor do I intend to retire there.

Llena Caldwell · Answer

@Dave Foster Thank you for clarifying this for me. Yes, I’d really like to exchange it for a multi family investment property where I will retire (San Antonio, TX).

Dave Foster · Answer

@Llena Caldwell, Well part of your question is more about the marketing and how to just get the property sold. I'll let others speak to that.

From the 1031 perspective... If you do a 1031 you'll defer all tax on gain and the 8 years of depreciation recapture. This part is relatively easy. Once you get a contract for sale your QI enfolds into the regular closing process for the sale. The closing of the sale will start your exchange time frames.

As far as your replacement property goes you can purchase any type of investment property in any location. So something closer to where you live now. Or a property located where you want to retire. You use the property for investment for a while and when you retire you move into the former investment property. Converting that property by changing the use of it does not create a taxable event. But it allows you to sell your old primary residence tax free.

Good luck on the marketing of that old property. You may want to calculate the gain situation and think about reducing price a little to force a sale but offset that with tax savings and still come out ahead but get rid of the albatross.

How do I use a 1031 exchange to get out of a SFH?

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