Buy properties out of state during my 1031 exchange?

Question

I’ve grown tired of Washington taxes, traffic, politics and weather. I’ve visited Fairbanks Alaska and Las Vegas Nevada over the last couple of years. I liked both. They both meet my criteria, with Vegas getting the better nod due to more tech job opportunities (management) than Alaska (nothing). Plus Vegas is centrally located and has nicer weather and better entertainment options.

Sooooo, I own a few rentals here in the Puget Sound/King County and am selling another one via a 1031 exchange (have done them before). I was thinking of using the money to buy in Vegas via a realtor instead of buying replacement properties here. As it stands, I’m scheduled to move in just over 3 years. I’m considering either speeding this up or slowing it down depending on career opportunities and quality of life here.

The only concern I have is that I’d have to hire a property manager. So basically slightly cash flow negative or break even, depending on the property.

I am not sure whether I should just buy here again for now or begin building assets in Las Vegas? I could buy four replacement properties there or two here.

Dave Foster · Answer

@Linda West, Yes, Like kind refers to the use of the property for investment. Any kind of investment real estate any where in the US can be exchanged for any other type in any location in the US. Rental for vacant, Commercial for residential. As long as it's used for investment it's 1031 compliant.

Regarding the CA clawback - It's nothing to fear until you sell. You have an annoying annual reporting requirement. But CA respects 1031 at the state level. As long as you continue to hold the replacement property you will defer the tax. As long as any time you sell the property you do another 1031 you will continue to defer the tax. When and if you finally sell without then they will claw back their tax on profit while it was in the state.

Linda West · Answer

Question on the finer points of ''like for like" under the 1031 provisions. I believe that I can exchange a rental property, ie condominium for a vacant lot. Can anyone confirm or deny?

Jack B. · Answer

I'm still undecided on this.

Phillip Dwyer · Answer

@Linda West I don't advise clients on tax issues, but I have helped people selling California investments buy replacement properties via 1031 exchange in the Vegas market. Between their CPAs and a good third party intermediary, they get the information they need on how to navigate the California reporting requirements.

Casey Powers · Answer

I often end up managing properties where the owner is upset about the negative or low cash flow once they see that it often doesn't rent for as much as they'd hoped. Rents haven't caught up to home prices yet, especially in the popular neighborhoods. It is possible to get properties that can cashflow here. Appreciation potential is probably much better here than just cashflow.

Mary M. · Answer

the only thing I have to add is that with scarce good deals out there I would not be starting a 1031 right now..... unless maybe you are buying in an area with a lot of good deals hanging around.....?

Clayton Mobley · Answer

@Jack B. , I agree with @Jeremy Bartlett that it makes sense to start building your portfolio where you want to be if your goal is to have your investments be in your home market, at least eventually. The puget sound market is pretty inflated as it is, so you may have an easier time riding out any upcoming correction in a less heated market. Of course, if you're just looking for a place to put capital into REI and your goal is cash flow, there are other markets where you could definitely be putting your money could do more than Vegas, although I'm not sure what specific numbers you're looking at.

If you are pretty set on moving down there and you want to have your investments in the same market you live, then I'd say get started building your portfolio down there where your capital will go further. At the very least it'll be an excuse to head back down for a bit to meet contractors/agents/PMs (I always rec making the trip to meet and greet before pulling the trigger) ;)

Best of luck!

Linda West · Answer

Hi, Philip. I too am not a tax professional, just a humble multi-state investor, so everyone concerned should definitely consult with knowledgeable professionals in this area. 1031s involving California are not for the faint of heart. I'm curious how you advise your clients in this regard, since you mentioned working with people in line for the clawback.

Phillip Dwyer · Answer

@Linda West I'll start this off by stating that I'm not a tax professional, so you'd want to consult with your tax advisor on this question specifically. That being said, does the clawback work similar to the capital gains in that it continues to defer until the last property is disposed?

Linda West · Answer

After learning about CA's "clawback provision", I'm resigned that all my CA purchases will end in CA sales. Would love to hear how you are advising your CA clients wishing to do out of state 1031 in that regard. Thanks!

​Buy properties out of state during my 1031 exchange?

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Buy properties out of state during my 1031 exchange?