What if I cant 1031?

5 Replies

I will be closing on the sale of my 3 family next month for 450k and I will be netting about 100K before capitol gains tax.

My problem/question is that my first year of self employed income does not qualify me for loan (from a bank) to go out and buy a property of equal or greater value than the 450K.

I am using a direct mail campaign to find motivated sellers of multi's in my area and I am in search of sellers who will carry back.

Not finding a seller who will carry and not using a private lender leaves me buying a property cash and paying capitol gains tax.

Any suggestions or questions would be helpful. Thank you BP community.

@Jack Sarcia  

 Well you're making some good moves.  Here's a couple of other 1031 related options.

1. Run some numbers on what you qualify for to see if a partial exchange would benefit you.  In a partial exchange you either buy less than your net selling price, or you take proceeds out as "boot".  The IRS interprets that as taking profit out and you will be taxed on that.  However if there is still profit left at that point then you could successfully defer that portion in a 1031.  Example.  If your gain was 50K on a net sales price of a 150K property and you can only qualify for a loan of 135K.  In this instance you could still do a 1031 exchange and buy a  net purchase price 135K property.  You would pay tax on the difference between the 150 and 135 - or tax on approx 15K. But you would still shelter the tax on the remaining profit of 35K.  Something your accountant or QI can run you through.

2. Another play that would give you some relief and may delay things long enough to be of help  is if you are closing between now and Dec. 31 you have the opportunity to shift the date of recognition of your gain into 2015.  You can do this by starting a 1031 exchange in 2014.  When the 45 days is up (and again when the 180 day period is up) you have the options of ceasing the exchange.  This would mean that you will pay the tax but there are two things that happen.

first by starting the exchange in 2014 but not accepting the proceeds until 2015 as a cash based tax payer that is when the gain occurs.  So you would not have to pay the tax until April of 2016.

Secondly, and maybe more importantly, by starting the exchange and stretching it into the new tax year it allows you to file a second return for your business which might mean the difference in qualifying.  There are many banks and lenders that can give you a pretty good answer based on your bank statements and ytd P&Ls for your business whether the 2014 return will help or not.

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Hi Jack,

Although it might not fall within your investment goals, objectives and guidelines, you might want to consider investing in a Delaware Statutory Trust (DST). Investors can 1031 Exchange into a Delaware Statutory Trusts. Essentially, the investor buys into the trust as a beneficiary, which qualifies as a purchase of investment real estate. The biggest plus for you is that the properties are put together by a syndicator/sponsor, including the financing. The individual investors do not qualify for the financing. The lender underwrites the property and not the investor. Generally, the holding periods are 5 to 7 years, so it might buy you some time to get your finances and taxes into a health position and then you can 1031 Exchange out of the DST when they sell and into property that you choose yourself. It gives you one alternative that would at least allow you to defer all of your taxes and keep you money working for you.