Newbie- 5 acre flip- offering owner financing- 1031 exchange

[James Greenwood]

Hello!

Seeking any advice from the pros on owner finance and 1031 exchange. Thanks in advance!

I purchased an inexpensive 5 acre property out of state (1000 miles) for two reasons. 1 to gain experience and confidence in RE investing. And 2 to make a profit. I have never physically been to the property.

I purchased it for $6,000, listed it for $19,000 with an option for owner finance. Today I received an offer for $13,000. $10,000 down with three $1,000 payments at 6% interest over the next three months. My agent is suggesting a trust indenture over a deed of trust.

I'm happy with this offer as its the first in 6 months. Are there any red flags, warnings, tips etc that anyone has for me in regard to the owner financing?

My second question is... can I do a 1031 exchange with this property?

Is it worth it on such a small deal?

If so, how do I set up a 1031?

Do I need to hire someone to file it for me?

If I 1031 it but don't find a new deal in time, will I default back to paying capital gains taxes? Or I am I obligated to find a deal?

I have been actively looking and preparing to purchase a $50k-$60-range single family rental in my local market. It would be great if I could pull off a 1031 early on in my experience so that I will be more familiar with it for bigger deals in the future.

Thanks

[Dave Foster]

@James Greenwood Love you're approach to the learning curve.  Jump in feet first but in the shallow end of the pool.  I like that!!

There's a couple of problems with a 1031 on this property.  

1. It sounds like you did not buy it with the intent of holding for productive use.  Rather you bought it with the primary intent of resale.Property eligible for 1031 are properties you bought with the intent to hold.  And while there's no statutory holding period if you bought it and then listed it you're pretty much demonstrating your intent to sell right there.

2. You're not making a ton of money.  A great return for the size of the asset but the tax overall isn't going to be that much - figure a couple grand?  So if an exchange costs you $750 you're only saving a grand or so.  And while that's nothing to sneeze at when you couple that with item 1 above it kind of says may forgo the 1031 on this one.

3. The owner carry is problematic as well.  There are ways to combine a 1031 with owner carry but there is some extra expense.  And you're already not saving that much in tax.

1031 is not a DIY thing.  You have to use the services of a qualified intermediary.  They set up the exchange with the closing company, handle the transfer of funds, and consult with you to keep you on the straight and narrow.

You are correct.  There is no penalty for starting and not completing a 1031 exchange.  If it fails you simply pay the tax.  

There's a ton of ways to use 1031s to mitigate your taxes and boost your returns.  So you're right to start getting introduced to them now.  But on this transaction.... probably not.