Weighing Options on a 1031

[Terrence W.]

Hi all! I'm new to the forums and wanted to see if anyone had some advice on how to start out with a 1031 exchange. I'm lucky to have inherited a property in San Francisco that I would like to sell and buy something closer to where I live in Denver. I would like to get into multifamily, but I'm having a hard time deciding where to focus. I could buy a small size apartment building or a couple of plexes. I'm torn between the small apartment because it will allow me to do one deal, but I'm not excited about having to do a commercial loan because of the loan terms and ballonpayments being due after 5/7 years. If I go with smaller plexes I think it might be hard to find enough properties to use all of the money in the 1031 exchange. I know this is a really terrible problem to have, but any advice would be much appreciated. 

[Clayton Mobley]

Was just going to say what @Christopher Phillips said. If you recently inherited the property (therefore receiving a stepped-up basis) and prices in your market haven't just suddenly skyrocketed, then you likely don't need to worry about gains. Although SF is a pricey market, so if you've held it for even a little while you may have gain - obviously you would know better than we!

I'd also like to pipe in with a reminder about the identification rules of 1031s. Sounds like you already understand the issue of closing multiple deals, but more specifically, remember the 95% and 200% rules with regard to identifying more than 3 like kind properties. If you identify more than three (which you would want to do it you go the -plex route to ensure you have options if a deal falls through), you either have to ensure that the value of all the properties you identify does not exceed 200% of the value of your relinquished property OR that you purchase properties equivalent to 95% of the aggregate value of all the properties you identify. 

So, if your property will sell for $1 million, you can identify three like kind properties at any value OR identify as many as you like as long as the total value is not more than $2 million OR identify as many as you like, with no value limit, as long as you purchase 95% of the aggregate value. So, if you identified 10 properties with a total value of $5 million, you'd need to purchase however many properties add up to at least $4.75million - meaning you'd need to fork over an additional $3.75 million of your own capital. Otherwise the exchange is invalid. 

It's possible you already knew this, but its always good to have someone lay it out in a thread to make sure it doesn't get overlooked - 1031s are an awesome tool, but they aren't for the faint of heart. If you're considering it, I'd advise finding a trustworthy Qualified Intermediary (there are plenty on BP, I'm sure you can find a rec) and consult them before moving forward.

Best of luck!

Clayton