1031 exchange questions

10 Replies

With the 1031 exchange

Do you run numbers as usual on “like kind” properties and then present them to a lender?

How would that work being that I wouldn’t need the purchase and renovation cost to be covered completely by the lender?

What is the most advantageous way to do this as an investor, use the proceeds from the exchange to cover the purchase price?

Is it possible to use one realtor to list and another to locate the like kind properties ?

@Ishmael Johnson ,  There's a heap of questions in there.  Start with this - The 1031 is a sale of investment real estate followed by a purchase of investment real estate.  If you want to defer all tax you must purchase at least as much as your net sale and use all of your proceeds from the sale in the purchase. 

1. It's not uncommon at all for a 1031 to start in one state and end in another.  So it is perfectly fine to use one realtor for your listing and another for the purchase.

2. Since the order is sale followed by purchase a lender can always source the funds being held by the 1031 qualified intermediary.

3.You can only use the proceeds for the actual purchase of real estate.  You cannot exchange into improvements on property you already own. So unless you do a complex and expensive manuver like a "reverse improvement exchange your best course is to use the proceeds to purchase real estate.  And source other funds to do improvements.

4. Any kind of investment property is "like kind" to any other type of investment property.  As long as it is real estate being used for investment it can be exchanged for any other type.

@Dave Foster

Thank you

I’ve been doing research and I’ve been hearing to start locating “like kind” properties before my 45 days begins, but how will i accurately do so if i don’t know how much the relinquished property will sell for.

How will i know how much i will need from a lender if i haven’t sold the relinquished property to see how much more funding is needed ?

@Anthony Shaw yes, you can sell multiple and purchase one (or sell one and purchase multiple) or any combination you can dream up.  Partial properties included (e.g. buying 33% of a property or selling 50%)

What matters are the following:

  • everything you purchase is, when summed, worth at least as much as what you sold.
  • all of your net sale proceeds are escrowed and used as down payment on the purchases.
  • you identify all of your potential replacement property purchases within 45 days of your sale. (If you ID more than 3 properties, rules change and get more difficult)

Does this answer your question?

@Ishmael Johnson , Well thats kind of the dance.  You have to project and estimate some things.  I usually tell investors to look for the right property that fits your parameters and don't simply worry about fulfilling an amount for the 1031.

Many people will actually go under contract for their new property before their old property closes.  So it is usually possible to get a close estimate to what you'll be able to borrow and what you want to buy.  

@Anthony Shaw , Sure can.  We commonly call that a consolidation exchange.  And can be very useful for buying up to better cash flow but also to less management

It's the amount of the purchase that matters not the number of properties.  So just like you can sell one and buy multiples.   You can sell several and buy one.  As long as the purchase will absorb the reinvestment requirements of both sales and you meet the timing requirements of both exchanges.   

@Dave Foster

The going under contract phase has always confused me, cause i never know when the lender comes into play or when it actually becomes a deal.

Also can a 1031 exchange be done when the relinquished property still has a mortgage on it ?

@Ishmael Johnson , Yes,  The is just an added part of a regular closing.  So the title company prepares the closing (the QI for the 1031 adds some documentation).  Part of that closing is the pay off of any debt that is attached to the property.  The mortgage has to be paid off before a clear title can be given to the buyer.

This is why the reinvestment requirements for the 1031 are that you purchase at least as much as your net sale (the contract price minus closing costs).  And that you use all of the net proceeds (the net sale minus mortgage payoff) in the purchase if you want to defer all tax.

@Dave Foster

I was in discussion with a realtor in regards to listing the to be relinquished home and she referred me to an REO agent so i could begin to identify "like kind" properties. My intent is to find undervalued properties and create equity through renovations. Is that a good approach when attempting to complete a 1031 exchange ?

And once I have a property under contract should i always hire a property inspector, as well as a contractor, or does the contractor come into phase once I’ve already purchased the “like kind” property?

@Ishmael Johnson , Sure.  That approach lets you force appreciation.  The 1031 proceeds can only be used for the purchaes of actual real estate and not on improvements on property you already own.  There is a process called a reverse improvement exchange that could work.  But it quickly becomes cost prohibitive when purchasing multiple replacements.  You're probably better served at the beginning simply buying the value add properties and then improving them as you can.

Inspectors and contractors are two different animals.  Inspectors help you evaluate the property to see i you should. buy it and if you can get financing on it given the condition.  The contractor works with you after the purchase to rehab the property.