My husband and I are moving to Colorado Springs. We are selling 2 rental properties in Texas.
1st question, can we use proceeds from the 2 investment sales to purchase 1 rental/investment property?
2nd we are diy'ers and will do all updating work. Can we live in the property while we do the work. If so, how long?
Thank you in advance
we want to buy a single family or townhouse for cash.
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Thanks Roger, we will have approx 240k from the sale of both houses, we'd like to use it to buy 1 house cash. We want to do a 1031 exchange. ALSO we plan on living in it for a few months while we are working on it, allowed? And if it is allowed how long
Hello Joan, as far as using the funds from multiple properties into one property, this is allowable for 1031 exchange - as long as you are moving like-kind from investment property to investment property (not owner occupied), so this part is perfectly fine.
As for living in the unit to fix up before renting is going to be a potential issue. They might question the purchase as it appears initially as a personal/primary residence instead of an investment. I would strongly recommend discussing directly with a 1031 Qualified Intermediary to discuss how to address the potential work done on the purchase. There are some here on BP or let us know if you'd like a recommendation.
Sorry a caveat I didn't mention that will likely be an issue in this scenario. Both the value and equity of the purchase price must be equal to or greater than the home you sell to pay zero capital gains taxes. Even if you move all equity, the value of the home you purchase mist be equal to or greater to the selling price of the two homes you sell combined.
@Joan Brazie Yes you can choose any variation of number of properties as long as you trade equal or up in value.
Typically the IRS doesn’t allow you to use the property as a primary. The property/properties your selling and the one your buying must have been held for rental, investment or used in a trade or business. The best way to show your intent is to never use the property for personal use. You are allowed to purchase a property where you’d rent a portion out and live in the other portion but I’d recommend not using your exchange funds to purchase the primary portion. Let me know if you’d like to discuss.
Hi @Joan Brazie , if you want to purchase another rental property and actively manage it, a 1031 may be a great solution. If you don't want to manage another property and are an accredited investor, you can do a 1031 and invest in something like a DST, becoming a passive investor. DSTs are hands-off, institutional grade real estate investments that offer long-term income and allow you the option to diversify. Best of luck!
Ok, just so i understand. I'm selling 1 house that has been a rental for 5 years, it was previously my residence. Closing date 11/10/17 It sold for 262.5, I should walk with 130k
The other house has been a rental for 6 years, it's going on the market next week. Should get 220k and walk with 60k.
To take advantage of the 1031 exchange do I have to purchase one property for 482k? I was looking at properties under 300k so I can pay cash.
Secondly, we were going to stay at the new investment property 3 or 4 months to renovate. BUT we do have a large motor home we can use as our residence.
I'm so thankful I found this site, thank you for your help.
@Joan Brazie If your net sales price is 480k then you’d have to purchase a property that price or higher to complete a 100% tax deferred exchange. You would have to replace all the equity and all the debt. Some don’t want to take another loan and in that scenario they either choose to bring additional cash to closing or they pay the tax/depreciation recapture on the difference.
Living in your mobile home while updating may be your safest route.
Lauren, thank you for your help, I'm considering a multi family or commercial property.
@Joan Brazie , This is either a precursor or follow up on a question I just addressed in another forum. But exactly where I was taking you. the exact numbers help.
In order to defer all tax you must purchase at least as much as you sell (482) and use all of the proceeds (300) in the next purchase or purchases - doesn't matter if its one or multiple properties. You are in theory going from 2 to 1 thats simply what we call a consolidation exchange.
The huge advantage to you is that you can allocate that 300K in any way you want. In fact I have quite a few clients right now using this exact process to mitigate risk of a market down turn. If you want you could buy a 250K property for cash and use the other 50 as a down payment on a 250K property. That way one's off the table and safe from any downturn .
Your other question about living in while you fix is an interesting one. There is specific IRS guidance that does not count the number of residency days you are actively working on a property when determining your eligibility for depreciation, expenses, and interest deduction. However, it does not directly transfer this guidance into a 1031 situation.
In theory as long as your intent is to purchase the new property to hold for productive use, and you could demonstrate that it might be appropriate. I'd make sure your accountant is on board. And definitely get your new residence lined up while you're doing that so you can show where you will be moving.
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