Please help me (1031 exchange)

15 Replies

BP family -

Hope everyone is doing well. I'm completely confused please help me understand this 1031 exchange.

I have a cash buyer that wants to buy one of my rentals property for 234K that I purchased 10 years ago for 54K. We signed the contract and looking to close on the 7th of July. Now, my questions are:

1-Do I need 1031 exchange to avoid paying the capital gain tax given that I own the property for more than 10yrs? If so, is this before the closing or after?

2- do I let the buyer know now this is a 1031 exchange?

3- where do I begin? Who do I contact? I live in NYC and the property is in Florida.

4- can I use that profits to invest in more than one property?

Any insight that anyone can provide will be extremely appreciated.

Please excuse my grammar English is my second language.

Hi @Maria Felix , you need to contact a qualified intermediary ASAP.  They will be the ones that process your 1031.  I'm not sure if they need to be in FL or NYC but I would try NYC first.  You should also be looking for your next properties to invest in now since there is a tight window (45 days) to identify your next properties.  

1. Yes, you need to 1031 to avoid capital gains no matter how long you've owned it.  This is done before closing, you will never have possession of the funds.  

2. You should let the buyer know.

3. See above.

4. Yes, you can invest in multiple properties but it makes it a little harder since you are juggling more balls in the air.  

@Maria Felix

First you need to select a 1031 intermediary. This is critical because you can't receive the funds or it will be taxable. The 1031 intermediary will coordinate with your title/attorney. The 1031 needs to be mentioned in your sales and purchase contracts, an addendum should work for this. The location of the intermediary is irrelevant, anywhere in the USA. You can use it to purchase multiple properties. It is critical that you identify (and preferably be in contract on) all the replacement properties within 45 days of selling your property, so start looking!

@Dave Foster and his team have been very responsive, and patient with my crazy lender.

@Maria Felix your attorney should direct you to a company that handles the 1031. Proceeds won’t go to you, it will go to the 1031 exchange party and proceeds must only go to a like kind property. You have a total of 180 days to find this investment. I’m in the very early stages of this now. I live in NYC too and selling a property in the Bronx.

Originally posted by @Doris Moreno :

@Maria Felix your attorney should direct you to a company that handles the 1031. Proceeds won’t go to you, it will go to the 1031 exchange party and proceeds must only go to a like kind property. You have a total of 180 days to find this investment. I’m in the very early stages of this now. I live in NYC too and selling a property in the Bronx.

Not to nitpick but I just want to make sure we’re helping Maria as correctly as possible - you have 45 days to identify the property, not 180. And within reason, you’ll easily satisfy the link kind part.

@Maria Felix ,  I think I answered most of your questions in our PM exchange.  But for the good of the group...

1. The length of time you've owned a property doesn't matter.  if it is not your primary residence you'll pay tax unless you do a 1031 exchange.  

2. All parties must be provided notification that a 1031 is occurring.  But there is no requirement that it be in the contract.  A good QI will provide all necessary notifications as part of the closing.

3. Your qI must be in place prior to the closing of the sale.  so now is the right time to get your QI in touch with the company handling escrow.  They will be your guide through the 1031 (including helping you manage the 45 day identification period and 180 day exchange period).

4. Yes, you can purchase more than one replacement property.  As long as you purchase at least as much real estate as you sell and use all of your proceeds in the purchases you'll defer all tax.  This is a classic 1031 strategy called a diversification exchange.

It’s super easy to do. I did one and just used a QI from the title company I was closing at. I didn’t tell the buyer. Why would that matter. It cost me $800 combined for both selling and buying transactions from the QI.

@Maria Felix the end first, forget 1031s! It's too late fir one. Finding a replacement today is nearly impossible and forces si many bad decisions and bad deals to be bought.

Cap gains is good! Lowest in decades. Just pay the tax and dobt let the tail wag the dog. You'll gain back many sleepless nights, I assure you.

@Curt Smith I have to disagree with you for the OP’ needs, as stated in her original questions:

The OP’s first question tells us that she wants to avoid paying capital gains taxes. In my rough estimate - not knowing her other income, capex, and assuming $10k in claimed depreciation over the holding period - she would pay about $40,000 between state and federal taxes in the absence of the successful exchange.

Assuming she will not be leveraging - despite her question 4’s suggestion that she wants to - her ~$220k replacement purchase would need to go down in value by about 20% to hurt her (ego - unless she may need to sell before the property value recovers.)

Since we know that she still wants to be in the investment game, why would she need to incur taxes instead of getting some cash flow on that $40k - or especially on $40k leveraged x4 - and likely for decades to come in her life, and then to be inherited through her estate beneficiaries at the future stepped-up value? (Of course, I have no idea what the laws will be then - but know what they are today.)

I agree that she may face sleepless nights - depending on her personality - but, if successful, she will only be a stronger investor as a result. My first exchange was during what I thought was still a buyers’ market, and I was looking to repeat some prior successes of getting great deals. Unfortunately, I wasted too much time living in the past, and by around day 40 settled on “bargains” in a market that was least preferred (which was still in a buyers’ market phase, unlike the others) - anxiety, lack of preparation (understanding of reality) in new markets I wanted to get into, and wishful thinking worked against me.

Lesson for the OP: start identifying the markets - and getting in touch with local agents there - before you are at the sale closing table. Make sure that you have clear goals in mind for what you are looking for, and communicate them to the agent(s). I’ve had agents who never replied, or those who promised to get me great deals despite apparently knowing that those were empty promises. (As much as I don’t like being ignored, I prefer that to empty promises that waste my time. I don’t wait too long before contacting another agent in a market I am interested in if I don’t hear back from the first agent I reached out to.) (I think there have only been two or three agents I never heard back from… I may reach out to them one of these days - “Pretty Woman”-style - to let them know what I ended up buying in their markets over the years since. “Big mistake. Huge!”… I won’t.)

I’ve had agents simply put me on an email drip for anything new that would hit the market in a given property category (like “tenant-occupied,” etc.) with no regard for any other search criteria I provided. If the properties that the agents will start providing you in response to your stated goals - after promising to meet your goals - do not meet your goals, state your goals to them again, be firm, and politely remind the agent that you’d rather not waste their time if they are not likely to meet your expectations. You are in control. You may soon realize that a given market (rather than the agent) simply cannot not meet your current goals. Your options then are to look for another market or to adjust your goals to the given reality of the time for the specific market.

This is definitely a sellers’ market in the markets I am interested in. But I was able to get a nice suburban Georgia package of duplexes in April - yielding just over 1% - after selling a CA property in March. It is still possible; though, this was likely an anomaly - luck. And I am on day 12 of my latest exchange. (Fingers crossed.) I may not be able to repeat the April purchase success, but the potential tax liability reminds me of my longer-terms goals, which means that “overpaying” for replacement property(ies) may still be a better option than paying taxes.

1. As a number of other replies have stated, it is not too late to line up your 1031x QI, but you should definitely get on that before you get to the point of signing the sale closing docs. I’ve used the same QI - incidentally, based in NYC (not that it matters what US state one is in) - for years. While their price has gone up since the first time I used them, it still starts under $500 for 1-1 exchange.

I typically give my buyers complete autonomy in choosing the title/escrow company. Once their title company contacts me, I loop in my (previously established) 1031QI in my reply email to the title person who contacted me, advising the title person that this will be a 1031x transaction and that my QI is cc’d. The QI takes over from there for anything related to making sure that all the necessary docs show that the proceeds of the sale are to go to the QI. (This does not mean that the title company will remember this - I’ve had a number of cases where this was overlooked again and again. Just verify that the QI is listed as such in your closing docs, and keep cc’ing the QI on all related replies to the title company.)

Your 45-day clock starts when you close on the sale of the relinquished property. Be mindful that if you get into a contract to buy a property still under construction, it will need to be built (so you can close on the purchase of it) well within 180 days of the closing of the sale of your relinquished property (not 45 days + 180 days.) Given current uncertainty of cost and availability of materials and labor - on top of typical weather-related delays - some builders may not meet their deadlines by a long shot.

Depending on your personality and potential “hand-holding” from a knowledgeable person you trust, the process will come with anxiety. Once you are in the 45-day ID period, you will have other requirements to consider (that you can ask to clarify at that time.) But you should come out of your first successful exchange with a higher appreciation for real estate investing. Good luck.

@Curt Smith  

There are still deals out there. Late nights are likely. Everything that @Al D. said about finding replacements this year has been our experience as well. Even if the market drops, I would rather the sellers have my cash than Sacramento or Washington.

To all,  I'm only offering my views.  I'm not a newbie, have spent thousands / yr on education and access to expertise.     Its completely under estimated the difficulty in finding the replacement deal that is really a "good deal".   Deal faciliators and others who like 1031 will of course offer their "pro" views.  Thats ok, but folks please use judgement when taking advice.

I hear so much fear of paying taxes.   Did you actually calc the tax you'll have to pay?  I bet its alot less then you think.  Its 15% (or less) of the gain, not the total, but gain between selling price less many expenses less your cost basis.  A much smaller number.

VS the work, hours, hassel of pulling off a 1031.  My anti-1031 views may be due to my adversion to real work, hassel, sleepless nights where I set a high priority on quality of life.  We built our business and when we have a gain, we gladly set aside the taxes due.  We got the cash from the sale there's no pulling out of checking account... Just set some aside for next April.  No work, no worries.

On the pro-1031 side.  Sure go ahead and work your buts off all to save $7.5k in taxes.  When you got $100k at closing, $50k is the gain, 15% of 50k is just 7.5k.  So now you sit pretty with $92.5k.   Is that so bad?  Post 1031 purchase, what do you have?  Probably no cash at all, its all tied up in hopefully a good deal.  But I've seen some pretty BAD deals rushed into is one of my points.

Just offering a counter view.  Best to all!!!   

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