1031 Exchange Question

6 Replies

Hello hive mind,

I have a question about 1031 exchanges: is it possible to sell a property and 1031 the proceeds into another property we already own to pay off the balance? If the answer is no, are there any tricks or workarounds?

Bonus points: is that a good idea? why or why not?

Bonus bonus points: looking for referrals for an airbnb/landlord friendly real estate CPA in the Los Angeles area.

Thank you!
R&D

Originally posted by @Ryan Galloway :

Hello hive mind,

I have a question about 1031 exchanges: is it possible to sell a property and 1031 the proceeds into another property we already own to pay off the balance? If the answer is no, are there any tricks or workarounds?

Bonus points: is that a good idea? why or why not?

Bonus bonus points: looking for referrals for an airbnb/landlord friendly real estate CPA in the Los Angeles area.

Thank you!
R&D

Hi Ryan,

I see you're in LA - I am a local attorney and investor. To answer your first question, the law says you must acquire a property with the proceeds, so I think it would be tough to justify this. There may be some tricks, but not familiar myself. @Dave Foster is an expert on 1031 matters, and can probably answer this better than me. 

Is it a good idea? In my view not really. Interest rates are very low. If you can find a good deal to put the money into, you can get a return that is meaningfully higher than the interest rates we're paying on mortgages. 

Of course, if you're retiring soon or something like that, then paying off property and just having the extra cash flow can be a good idea. Paid off properties are great, but if you're actively growing the portfolio, this does not seem like the optimal approach.

I have a few CPA's who are good with real estate matters, not sure about Airbnb specifically but I'd bet one of them has ideas. Happy to message you the information for both of them if you want to send a message or colleague request. 

 

@Ryan Galloway , The 1031 must be a sale of investment property followed by a purchase of investment property.  You can't use the 1031 to pay down the mortgage on a property you already own.  About the closest you can get would be to do a 1031 and sell and buy another piece of real estate.  And after that do a cash out refinance and use the cash out refi to pay off the property you want to.

It doesn't reduce your debt.  But it repositions your debt maybe to your advantage.

Thank you @Shiva Bhaskar , that makes a lot of sense. 

We are currently trying to figure out what our goals are RE: growth vs. income. Growth also requires more work, and we're starting to think about how to mitigate that problem. If our goals were purely growth oriented, then I 100% agree that putting the money into new purchases makes the most sense. If we were to do that, I'm also curious if you can 1031 the sale of one property into a purchase of multiple properties, of if it's limited to a 1:1 ratio.

@Dave Foster it's an extra step but it seems like a valid solution, thank you!

@Ryan Galloway , A diversification exchange is perfectly valid.  You sell one higher priced property and buy several less expensive properties.  As long as you purchase at least as much as your net sale and use all of the proceeds from the sale in your purchases you'll defer all tax.

And this would still work even better with a cash out refi later.  Sell, 1031, and buy two replacements.  Buy one for all cash and use the rest of the proceeds as a down payment on the second.  After the 1031 is complete do a refinance on the free and clear property.  You didnt pay extra loan fees.  You accessed the maximum cash.  You still completely deferred all tax.  And the tenants are paing the mortgageg.  What's not to like in that scenario.

Originally posted by @Ryan Galloway :

Thank you @Shiva Bhaskar, that makes a lot of sense. 

We are currently trying to figure out what our goals are RE: growth vs. income. Growth also requires more work, and we're starting to think about how to mitigate that problem. If our goals were purely growth oriented, then I 100% agree that putting the money into new purchases makes the most sense. If we were to do that, I'm also curious if you can 1031 the sale of one property into a purchase of multiple properties, of if it's limited to a 1:1 ratio.

@Dave Foster it's an extra step but it seems like a valid solution, thank you!

You can totally do this. I know of someone who sold a multifamily property with a lot of appreciation / equity thanks to the value add, and they had negotiated with an older landlord who was exiting the business to buy several of his properties through 1031, that needed upgrades and rent increases. They made a killing on that one.