Is 1031 right for me?

Question

Hi everyone, just sold home (well sorta) it's about to go into escrow but it just hit me, TAXES!! I've heard about 1031 but don't really know much how it works. I would like to buy another property preferably in Vegas, since I live here, but I'm open to suggestions on investing out of state. I don't want to just sell the house and let my money just sit there. I want to learn more on investing. I've been looking also into co-living. I have a second property which I currently live in. I want to learn more, I'm open to any advice or suggestions you guys have for me.

Thank you!

Aaron Zimmerman · Answer

Was your home you're selling a former primary residence? If yes, I'd look to see if you're eligible for the Section 121 exclusion where you'd be able to exclude $250k of gain if single and $500k if married.

I'd also look to see how much gain you have if the above is not in play. You could buy another property this year and do a cost seg if there's a gain on property 1.

I'd recommend connecting with a cpa before closing so you understand your options. The good news is it's the earlier part of the year so there's still plenty of time to plan.

Austin L. Smith · Answer

Hey Iovani,

CPA in Las Vegas,

If you are looking to reinvest your money back into Real Estate, a 1031 can be great for deferring the taxable gain.

However there are a few things to keep in mind when doing these transactions.

1. a 1031 is very structured, as in you have to follow certain items. The biggest item to follow is you need to use a qualified intermediary to facilitate the deal. In facilitating the deal, you won't see the cash as they are required to hold the funds. If you already closed, that ship may have already sailed.

2. If you decide not to reinvest the full amount, you may not qualify for the full deferral, and a portion may end up being taxable.

3. Also, it has to be like kind in the nature and characteristics of the investment, so the properties involved should be investment properties or properties used in a trade or business. Simplified terms, this just means you can't trade your primary residence in a 1031 exchange.

4. You have timing restrictions as you will need to identify the property within 45 days of closing and close on the new property within 180 days. Closing cost for 1031 exchanges are typically higher as well. So if you end up not doing the exchange, you may just end up with higher selling costs.

I would also suggest to not let the "tax tail wag the dog" as they say. Don't just make your purchasing and selling decisions solely on the tax benefits. It is important to optimize your tax planning/cash flow in alignment with your business goals as well. This can help with contingency planning as well, planning for the worst case scenario for property maintenance.

Now it looks like your also looking to discuss Real Estate Strategies. It sounds like you are interested in House Hacking, and co living arrangements. This strategy in my opinion is less critical for taxes, but cash flow planning. I think the biggest appeal to house hacking is the idea you can lower, mitigate, or eliminate your personal dwelling cost by passing it off to the tenant/roommate. Housing is typically the biggest cost in your personal budget, and freeing this up can create positive cash flow than you can redeploy elsewhere.

Sounds like you are big into education. The Tax Smart Real Estate investor run the Real Estate CPA podcast and discuss the tax strategies in detail. Don't forget, Bigger pockets also has their own podcast discussing these strategies.

I'd be happy to further connect and discuss these strategies with you. You want to make sure to discuss these strategies with someone familiar with your situation and your tax situation as well.

I love discussing Tax and Real Estate Strategies. Good luck on your future real estate endeavors.

Have a great night,

Austin L. Smith, CPA