1031 Exchange options.... what to do with my money??

Buying & Selling Real Estate
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1031 Exchange options.... what to do with my money??

Sarah Smith
Rental Property Investor · Las Vegas, NV · Member since 2016 · 42 posts · 21 votes

I am an experienced real estate investor.  I own over 70 rentals, but have primarily had a buy and hold strategy.  My husband and I have been trying to build our residual income.  We recently sold an 8 unit apartment complex that we built.  We have about $160,000 in profit from that sale.  I have not done a 1031 exchange before, but I feel that reducing my tax liability is a good idea.  All 70 rentals that I own are located in Butte Montana.  I was born and raised there and know the market very well.  I have recently moved to Las Vegas, NV.  It is a very competitive market in Las Vegas but at the moment it feels stable.  

I am looking for thoughts and input on what I should do with this 1031 Exchange money.  Should I continue to invest in the market that I know, but is now a long distant investment?  Should I branch out to this new market in Las Vegas?  Should I try and purchase a much larger investment and use this money as the downpayment?  I have been listening to at least 3 podcasts a day from Bigger Pockets and my mind is reeling with all of the possibilities and strategies.  So many viable options and I guess I am just looking to learn and grow from someone that may have more experience and expertise in this aspect of investing than I do.  Any insight or thoughts would be much appreciated.  Thanks!

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John Woodrich
Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
8y

To piggyback on a couple of comments here - you only have 45 days to identify the property you want to purchase.  I am not sure where you are at in this process but the clock is ticking!!  If you can't identify a property in 45 days you blow the exchange and your gain is now taxable.  The gain may also be larger than the $170k in cash so I would talk to your CPA to see your potential liability.  Would suck to blow the transaction and end up with a $100k tax liability leaving you only $70k to invest.

To the comment that you can't 1031 into a flip property - technically you can, you can exchange any real estate for any real estate.  However if you purchase a flip property and flip it - you will have to pay all the deferred tax upon sale as you can't 1031 a flip.  If you buy a flip property, renovate and rent it for a period of time this can work.

Last - I would confirm with your CPA the amount you need to spend to defer all gain.  If your old loan was $400k and your new loan is only $300k you have essentially received taxable boot...  These transactions work well if someone is going to step up into a larger property however they don't work well if there isn't a plan in place.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    8y
    Using leverage is the common advice, but how much is up to you. Of course you can decide to go more for appreciation or for cash flow, up to you. I assume you set up a QI before the sale and They are holding the sale proceeds?
    1Reply
  • Sarah Smith
    OP
    Rental Property Investor · Las Vegas, NV · Member since 2016 · 42 posts · 21 votes
    8y

    Yes. It is being held by an exchange company. I am leaning towards using it as a down payment for a much larger project. Thanks for your advice!  

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    8y

    Good luck 

    @Sarah Smith

    I’ve bought about a dozen buy and holds here in Vegas and have yet to sell one as I haven’t found the “next step up” please let me know what you find if anything. 

    Thanks. 

    -Bill

    0Reply
  • Sarah Smith
    OP
    Rental Property Investor · Las Vegas, NV · Member since 2016 · 42 posts · 21 votes
    8y

    will do @Bill B.  I am keeping my eye out for some fix and flips as well. My husband is a contractor so I am open to fixer uppers. 

    0Reply
  • Sherwin Gonzales
    Rental Property Investor · San Francisco, CA · Member since 2015 · 236 posts · 156 votes
    8y

    Scale up and go big! Get a bigger multi family property. One roof is easier to manage than a dozen or so separate roofs. What a great dilemma to have. Good luck with whatever you choose to do!

    0Reply
  • Casey Mericle
    Investor · Springfield, MO · Member since 2012 · 320 posts · 115 votes
    8y

    You’ve got a lot of options which is exciting. I think you need to decide what type of investment you want. 

    If you’re a hands on person then maybe Vegas is the place for you. If you can get better deals in Butte then stay there. 

    The next question is asset class. More rentals, a larger multi-unit, another type of commercial, if you run out of time you could always get into fractional NNN if you're looking for a totally hands off investment.

    Whatever it is, be quick as that 45 day timeframe flies by. 

    0Reply
  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Sarah Smith:

    will do @Bill B.  I am keeping my eye out for some fix and flips as well. My husband is a contractor so I am open to fixer uppers. 

     cant do flips w/ 1031 funds,

    1Reply
  • Sarah Smith
    OP
    Rental Property Investor · Las Vegas, NV · Member since 2016 · 42 posts · 21 votes
    8y

    @Matt K..... what are the guidelines. Do you have to hold the property for a certain amount of time?  I thought it just had to be a like kind exchange? 

    0Reply
  • Sarah Smith
    OP
    Rental Property Investor · Las Vegas, NV · Member since 2016 · 42 posts · 21 votes
    8y

    @Sherwin Gonzales thanks so much for the comment!  I agree that managing one larger unit is a lot easier. I want to scale up but I am not exactly sure how to accomplish that with only $170,000 in cash. 

    0Reply
  • Sarah Smith
    OP
    Rental Property Investor · Las Vegas, NV · Member since 2016 · 42 posts · 21 votes
    8y

    @Casey Mericle I wouldn't love to know more about NNN. I am not familiar with that term. I am interested in multi-family at the moment. I haven't ventured into commercial but would be open if I felt like it was a good fit. I agree about the 45 days flying by. It is slightly stressing me out!! Losing sleep for sure!

    0Reply
  • Michele G.
    Ann Arbor, MI · Member since 2017 · 109 posts · 52 votes
    8y
    Talk to your QI about the requirements. He should be able to give you the rules on what you can/can’t do and how long you need to hold a property, etc. I’m going through a 1031 myself right now & my QI has been a fountain of information. I’m still searching for my replacement before I list my property for sale because I’m worried about that 45 day timeline. Good luck!
    2Reply
  • Sarah Smith
    OP
    Rental Property Investor · Las Vegas, NV · Member since 2016 · 42 posts · 21 votes
    8y

    @Michele G.  thanks!  I need to reach out to them. Best of luck on your deal! 

    0Reply
  • Sherwin Gonzales
    Rental Property Investor · San Francisco, CA · Member since 2015 · 236 posts · 156 votes
    8y
    Originally posted by @Sarah Smith:

    @Sherwin Gonzales thanks so much for the comment!  I agree that managing one larger unit is a lot easier. I want to scale up but I am not exactly sure how to accomplish that with only $170,000 in cash. 

    If you want to go fast, go alone. If you want to go far, go together.

    -African Proverb

    Time to think outside of the box! Have you thought about partnering up in joint ventures or getting involved in syndication? Perhaps you can find a deal that offers seller financing?

    I had the same thoughts as you. I only have this much money so I can't afford to scale up. That's when I decided to partner up in a deal. 

    Start asking yourself HOW you can scale up with only 170k. If you find a great deal that needs 300k to close, you already have over half of that money. If you really like the deal, I'm sure you can creatively find where to get the other half.

    1Reply
  • Sarah Smith
    OP
    Rental Property Investor · Las Vegas, NV · Member since 2016 · 42 posts · 21 votes
    8y

    @Sherwin Gonzales I LOVE that. Such good advice. I have always told my husband if there is a will there is a way. I haven’t let no money stop me in the past so I just need to keep moving forward and scaling up. Thanks for the boost. I will keep scouring the internet and my network for the right deal! Thanks again!  

    0Reply
  • Alina Trigub
    Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
    8y

    @Sarah Smith Not sure if you're aware that in addition to do a regular 1031, there's such thing as partial ownership and it may qualify as 1031. What I don't know is: 1) whether the whole process needed to be started differently (I can refer you to a qualified professional who specializes in partial exchanges). 2) whether you're interested in taking a passive approach on this (as this partial exchange would be into an asset managed by someone else. It's sort of like NNN lease).

    Feel free to reach out to me if interested.

    Overall, I agree with @Sherwin Gonzales Go bigger and don't do it alone!

    Best!

    1Reply
  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    8y

    To piggyback on a couple of comments here - you only have 45 days to identify the property you want to purchase.  I am not sure where you are at in this process but the clock is ticking!!  If you can't identify a property in 45 days you blow the exchange and your gain is now taxable.  The gain may also be larger than the $170k in cash so I would talk to your CPA to see your potential liability.  Would suck to blow the transaction and end up with a $100k tax liability leaving you only $70k to invest.

    To the comment that you can't 1031 into a flip property - technically you can, you can exchange any real estate for any real estate.  However if you purchase a flip property and flip it - you will have to pay all the deferred tax upon sale as you can't 1031 a flip.  If you buy a flip property, renovate and rent it for a period of time this can work.

    Last - I would confirm with your CPA the amount you need to spend to defer all gain.  If your old loan was $400k and your new loan is only $300k you have essentially received taxable boot...  These transactions work well if someone is going to step up into a larger property however they don't work well if there isn't a plan in place.

    5Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Sarah Smith, one clarification to @John Woodrich's awesome analysis.  It's not so much that you have to take out the same amount of debt.  You can bring your own cash to the table.  If you purchase at least as much as you sell and use all of the net proceeds in your purchase then you will defer all tax.  Most folks don't have access to cash to replace mortgage.  So by default they have to take out the same debt.  But you don't have to.

    And that leads into what others have been hinting at - The 1031 requires you to sell investment property and buy investment property (most syndications set up as LLPs you buy into will not work).  But you can buy part of a larger property with another investor or investors as tenants in common.  So the idea of partnering up is an awesome one to help you scale.  Just make sure that you're actually taking title to replacement real estate and not buying an interest in a partnership.  Your QI will be all over that I'm sure.

    The 1031 Investor5137 Reviews
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    2Reply
  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    8y

    Good point on bringing more cash to the table @Dave Foster.  I have talked to TOOOOOOOO many people who thought they only had to spend their proceeds to defer the gain which is not the case.  Hopefully her QI or someone close to her has given her the information on how much tax she is potentially deferring and how much she needs to spend on a replacement property.

    1Reply
  • Zack P.
    CA · Member since 2017 · 31 posts · 11 votes
    8y

    @Sarah Smith I was recently looking into doing 1031, and decided not to sell, so I'm a bit rusty on this, but I believe you also need to bring in the equivalent amount of debt (or more).  

    Example: If you sold your 8-unit at $500k and you still owed $250k, then your 1031 property needs $250k or more in debt.  Check with your exchange company or CPA, but I believe this is the case. 

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Zack P., Not quite.  You do not have to carry equivalent debt.  It usually works out that way but you can add your own cash to exchange proceeds for your next purchase.  And you can take out more debt if you are buying more than you sold.

    As long as you purchase at least as much as your net sale and use all of the proceeds in the next purchase or purchases you'll avoid all tax.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Zack P.
    CA · Member since 2017 · 31 posts · 11 votes
    8y

    @Dave Foster  Thanks for clarification!

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    8y

    Forget commercial.

    170k down is not enough to own a quality NNN asset outright. Really need to get about 500k down or more to get decent stuff in good areas.

    Now you could possibly invest in DST if accredited investor with 1031 money.

    Example there is weak rural, weak suburban, strong suburban, urban core areas.

    170k down gets nothing of value in the desirable areas that is passive NNN. The land alone in those areas is 500k to 1 million an an acre before building the structure and profit rolled in on resale for a developer to sell to an end buyer. So those properties tend to be 2 million and up in price and generally 2.5 to 3 million or more.

    Conversely you could own a partial interest in a DST much larger property to be passive with 170k whereas owning in the quality area yourself with 170k down might be like finding a unicorn.

    STNL NNN commercial is not a yield play. Cash on cash before rent increases with newly minted leases is about 4 to 7% going in. These are mainly for retirees, high income earner doctor's or corp execs to park money, or owners that have sold off businesses. Since you own 70 rentals you have to decide how active versus passive you want to be.

    Everyone in existence is chasing the value add multifamily right now. Where you moved to Vegas ( Nevada), Arizona, etc. is highly cap rate compressed. California investors who sold off property getting 3% return are now plowing money into close by states they can drive or fly to easily and happy with doubling return to 6%. So the states close to CA tend to be more cap rate compressed because of demand from CA investors.

    Good luck and hope it works out well for you.     

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    0Reply
  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Sarah Smith:

    @Matt K..... what are the guidelines. Do you have to hold the property for a certain amount of time?  I thought it just had to be a like kind exchange? 

     Time isn't the big thing, I forget why flips don't work but I think it has to do w/ them counted as inventory. Basically, you could have a anything else (land, farm, condo, house etc) and do a 1031 if it was an investment. 

    So you could go from house to down payment on condo .... and if you don't get to tricky you can go as high as you want. There are limits to going lower and any of that money that isn't spent on property will be taxed (called the boot).

    Things get tricky when you do combos as an option, then you run into limits of how much they can be worth etc etc. So long as your intent is to keep it as an investment and you have it few years you're good.

    0Reply
  • Barri Griffiths
    Las Vegas, NV · Member since 2016 · 62 posts · 28 votes
    8y

    Hey @Sarah Smith

    I run a monthly Meetup event focused on multifamily investing.

    The next Meetup will be on the 24th of this month, it'll be up on Meetup.com next week. 

    It wouid be great to have you there!

    Cheers 

    Barri

    0Reply
  • Sarah Smith
    OP
    Rental Property Investor · Las Vegas, NV · Member since 2016 · 42 posts · 21 votes
    8y

    Darn it. I just saw this post today!  So sorry. I would love to go to the next one @Barri Griffiths

    0Reply
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