Have you done a 1031 Exchange? Let's talk!

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Have you done a 1031 Exchange? Let's talk!

Brandon TurnerPro Member
Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes

Hey BP Nation! I'm writing the world's best post on 1031 Exchanges. Maybe I'll put it in my next book. But here's the problem: 

I need you. 

You see, I need some good stories to go with the post. So, if you've done a 1031 exchange, let's talk. 

Let me know in this thread if you've done one, and wanna tell your story in an upcoming blog post. Include any info you want here. 

Thanks!

Podcast Guest on Show #92
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Rick H.
Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes
11y

I've completed a number of them.

In one case, I acquired a property in the East Bay, CA town of El Sobrante. Used this property for a portion of the cost to acquire my ranch near San Diego. This was very lucrative and made a deal possible that a few years before would never dreamed possible. Moral: it costs no more to have big dreams than little ones.

In another, I helped a friend acquire a valuable beach parcel in Maui in order to facilitate his acquisition with my 1031 money. He later onside he back, and got to build a magnificent home overlooking the ocean views. I've never visited it (amazing, I know). 

In another, I was a TIC partner with a couple other folks in a 34 unit apt building in Costa Mesa, CA. The seller had inherited the complex and lived in one unit. She discounted the sale price due to her belief that a neighboring tenant was stealing her shoes that were left out near the front door each night. Takes all kinds to steal shoes.

In another case, I helped a friend by exchanging his high-rise building in downtown Long Beach, CA. Also helped him do a number of soeculative land deals. Sadly, he lost all that he gained by ignoring market signal and refusing to improve his real estate knowledge by investing in his education. Some will, some won't...

Also helped other friends acquire and dispose of assets by acting as the accommodator when no conflict was present. Learned a lot. 

One thing I learned was that there is a bit of exposure and I'd rather pay an experienced accommodation like Jack Shea to provide the service.

Another thing I learned was that I have no use for all these women's shoes :-). 

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  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    11y

    @Mike Watkinson

    For all other 1031, not involving conversion to a personal residence, there is no 5 year holding period.

    1Reply
  • Michelle Moore
    Richmond, IN · Member since 2014 · 2 posts · 0 votes
    11y

    I used a 1031 in 2007-2008 to exchange 17 crap houses for one nice vacation home and several single family homes.  Things that I learned:

    1.  The only real risk is that the qualified intermediary holding your funds goes out of business or bankrupt or whatever during the process.  Even though the courts would probably get your money back eventually, it would take so long that you would go over the allotted time frame.  Be sure you are using a company who has been in business for a long time and is hopefully financially stable.

    2.  Supposedly, you cannot take any cash off the table, but it was necessary to pay off any outstanding mortgages including my line of credit that was secured by the properties being sold.  So, I am thinking that you could get some cash out of the deal if you took out a line of credit (or cash-out mortgage)  prior to the sale.  Question:  How long before the exchange would this need to be done to avoid raising any IRS red flags?

    3.  If you have kids in college, the FAFSA deadlines make it really difficult.  They wanted my tax information by March 1st, but I had to file an extension until my exchange was completed.  The FAFSA people allow you to file estimated numbers, but then they want the real numbers after you file by April 15th.  I was looking at an exchange in which properties were sold late Nov. 2007, and I had not yet closed on the replacement properties.  Two different colleges threatened to not give my two daughters their full-ride academic scholarships (not need based) unless the tax information was supplied, but I didn't even have it yet.  I finally just lied, said that I had filed, and gave them my estimated numbers.  (I told them "oops, I gave you the wrong forms" and gave them the corrected ones when the exchange was completed.)

    4.  It is difficult to find good deals on replacement properties within a time limit.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    11y
    Originally posted by @David Krulac:

    @Drew Denham

    I talked about 1031 on Bigger Pockets Podcast # 82.  In addititon to never paying taxes during your lifetime, you can then use the "stepped up basis" and your heirs get the property and the capital gains taxes that have been deferred during your lifetime can be

    WIPED OUT.

    In addition you can combine it with the $250,000, $500,000 capital gains exclusion on a personal residence by converting an acquired 1031 property after using it as an investment, think rental, then make it your personal residence. (Which you can do once every 2 years.)

     Be careful - it's not quite as sweet a deal as that anymore.  When you convert a property acquired in a 1031 exchange to your primary residence there are some additional requirements.  You have to have owned the property for 5 years as well as have lived in it for 2 out of the last 5.  You will have to recapture any depreciation taken.  And you will have to prorate the gain between primary residence use and investment use.  

    Still not a bad deal but not free either.

    The 1031 Investor5137 Reviews
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  • Mike Watkinson
    Brookfield, WI · Member since 2015 · 1 post · 0 votes
    11y

    @Michelle Moore

    2. Not 100% sure but I would assume you can cash out whatever you want before the deal. The substance of the law is that you are not receiving any boot, e.g., cash or debt reduction, without recognizing gain. If you are taking some of your equity out of the house before or after it is just a financing thing, not anything to do with you owning an asset that you traded for a similar asset of equal or greater value. Problems come into play when you sell for $150 and buy for $140, which results in you taking $10K out of the deal, through cash or debt reduction. As such, $10K is taxable and the rest can be deferred. 

    3. If you are paid up on what you owe, refiling with actual numbers shouldn't really be a big deal I would think. They won't penalize you unless you are didn't pay what you owe by 4/15.

    0Reply
  • Josh Bakhshi
    Real Estate Agent · Atlanta, GA · Member since 2015 · 359 posts · 158 votes
    11y

    We are in process of a 1031 currently.  We just sold one of our properties in CA for 860K with a current cost basis of 200K.  We are in contract to buy a office complex in GA for 1.2 million.  As far as the 1031, things are moving smoothly.  Our accountant said this will save us about 40K in capital gains taxes.  I'll let you know how it ends up.

    0Reply
  • Ron Shepherd
    Investor · Lancaster, PA · Member since 2015 · 9 posts · 2 votes
    11y

    If you want the stories to be included in the worst 1031 exchanges ever, I know an attorney who had to help one of his clients undo a 1031 exchange after she bought a replacement property that was only 10% of the sale price.  She had paid a "consultant" to help her put the original deal together.

    0Reply
  • Jim BroznyPro Member
    Investor · Batavia, IL · Member since 2015 · 58 posts · 24 votes
    11y

    I sold a 3-flat in Chicago in 2004 and did 1031s on a duplex and two condos in the western suburbs.  My wife and I were new to investing and we both had full-time jobs.  We found it difficult to work within the required time limits.  As a result, we had to settle on deals that weren't that great. 

    0Reply
  • Kris Patel
    Investor · Arroyo Grande, CA · Member since 2012 · 23 posts · 8 votes
    11y

    1031X:

    Always ask for interest from QI. I saved 7k for friends.

    No ask, no pay. Shop for interest, it is your money, sometime there for 6 months.

    0Reply
  • Dale Stevens
    Investor · Downers Grove, IL · Member since 2015 · 353 posts · 213 votes
    11y

    @Jim Brozny

     dare I ask which 1031 company you used?

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    11y
    Originally posted by @Josh Bakhshi:

    We are in process of a 1031 currently.  We just sold one of our properties in CA for 860K with a current cost basis of 200K.  We are in contract to buy a office complex in GA for 1.2 million.  As far as the 1031, things are moving smoothly.  Our accountant said this will save us about 40K in capital gains taxes.  I'll let you know how it ends up.

     Josh, the key to the ongoing success of your exchange can't be overstated.  You are quarterbacking a team of professionals and each of them are performing their role in the transaction. CPA, Intermediary, financial advisor, attorney - all have their place just like title company, inspector, and mortgage company in the purchase.   Kudos to you and your cpa for recognizing the opportunity, identifying the team and seizing the benefit.

    The 1031 Investor5137 Reviews
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    11y
    Originally posted by @Mike Watkinson:

    @Michelle Moore

    2. Not 100% sure but I would assume you can cash out whatever you want before the deal. The substance of the law is that you are not receiving any boot, e.g., cash or debt reduction, without recognizing gain. If you are taking some of your equity out of the house before or after it is just a financing thing, not anything to do with you owning an asset that you traded for a similar asset of equal or greater value. Problems come into play when you sell for $150 and buy for $140, which results in you taking $10K out of the deal, through cash or debt reduction. As such, $10K is taxable and the rest can be deferred. 

    3. If you are paid up on what you owe, refiling with actual numbers shouldn't really be a big deal I would think. They won't penalize you unless you are didn't pay what you owe by

    Actually it is a potentially big deal when you access that equity.  It all goes once again to your perceived intent.  The IRS is letting your do an exchange because you are leaving your position basically static (basis/profit) and simply "exchanging" into another property.  If you do a cash out refi immediately before you sell what are you demonstrating as your intent?

    There is some case law where that activity has been determined to be a way of taking profit and evading taxation - exchange dissallowed!  Far better to sell then buy and then take out new debt immediately.  That way there is no question of whether profit left the 1031 and made it into your hands.

    The 1031 Investor5137 Reviews
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  • Michael Colantone
    Plainfield, IL · Member since 2015 · 1 post · 0 votes
    11y

    No.

    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    11y
    Originally posted by @Jon Klaus:
    How long does it need to be a rental before you make it your personal residence, David?

    There is no set time period.  The critical issue is that you have the intent to hold as rental property.  The majority of conservative advisors, including myself, would recommend at least 24 months so that you straddle three (3) tax reporting periods.  However, the timing is only part of how you prove that you had the intent.  If you get audited, you must be able to demonstrate that you had the intent to hold for investment purposes (and not as a primary residence).  Your intent can change later, but if your original intent was to live there and the auditors know that, the 1031 Exchange can be disqualified.

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
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