accounting help, first 1031 exchange, problems with financing

4 Replies

hello BP! 

I am selling 2 of my rental properties in Indiana and now in escrow, it seems we will be closing on time. My question is: I was planning to do a 1031 exchange and found a condo in San diego and got our offer accepted. Everything was going as planned, however the HOA for the condo is only 41% owner occupied and 59% rentals. Our lender is giving us a hard time financing since they require 51% or more to be owner occupied. I guess this is known for rental property and HOAs. I now have to apply for an exception to Fannie Mae. Has anyone encountered this? Do you have any advice for a situation like this? How was your outcome?

It will cost us $200 Application to fannie mae, appraisal, inspection and HOA Certificate fee. And then we will have a response on the approval of the loan.

I am thinking of cancelling the 1031 exchange and just getting taxed on our capital gains.. Does anyone know  how that would turn out? How much I would get taxed? I have only held the property for only 6 months. 

ANY ADVICE, TIPS WOULD GREATLYY BE APPRECIATED :)

Hi! @Eunice Gonzalez The high investor ratio makes it a non-warrantable condo. Fannie/Freddie financing is not an option. I have seen Fannie Mae exception be granted only in small condominiums (i.e. just a few units).

You need to find a lender that can do non-warrantable condo financing.

Good luck.

@Eunice Gonzalez , You may be better off simply paying the tax.  Depending on your specific situation 6 months isn't a lot of time and might be suspect to questions of your intent any way.  Not doing a 1031 takes care of that potential question. 

Your accountant will have set up depreciation schedules if you were going to use the property for productive use and they will have a good idea of your adjusted cost basis.  Profit will be the difference between the net sales price and that basis.  You're probably looking at ordinary income tax maybe along with self employment and ACA surcharge as well.  Again, I would be asking my accountant.   You don't want to guess at a decision of this magnitude.

You could just look for other properties to identify, since the condo will not work.  Send me a PM if you want to talk about some options.  If you are still in escrow, your 45 days hasn't started yet and you still have time to find other replacements.