1031 exchange one property into multiple properties.

Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes

I will eventually inherit a house worth 700k which is owned free and clear. I would like to use the money as capital to buy many financed properties worth 100-150k each, so we are talking about making a lot of deals. There's no way I could possibly identify that many properties in 45 days.

Could I refinance the property and pull out 80% of the money and invest it at my leisure, then sell it and use the other 20% to conform to the 45/180 day rules?

Or maybe sell then buy the new properties with all cash and refinance later for further acquisitions.

Are there any tricks like that for extending my time to use all the money?

I know it would be easier to buy one large multifamily but I don't want to do that.

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Bill ExeterBusiness Member

1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes

13y

Hi Brant,

Ellis has a great suggestion there. You will likely receive a "step-up in cost basis" when you inherit the property. This means that the capital gain and depreciation recapture will completely go away. You can sell the property immediately after you inherit it with no capital gain or depreciation recapture taxes to worry about, and therefore will not need to worry about structuring a 1031 Exchange transaction. I would verify with your CPA that you will receive a step-up in cost basis when you inherit the property and then plan accordingly.

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Ellis San Jose
Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
13y
@Brant Richardson

I'm not a CPA or an attorney, however, I have implemented a similar 1031 strategy several times & can share with you the mistakes I made, the things I did right, & what I have learned.

Definitely seek advice from Bill Exeter for 1031 guidance, he posts on BP frequently.

Also, check with you CPA about the stepped up basis on the inherited property which may not have a large tax liability to you. You may be able to avoid having to use the 1031 exchange all together.

Could the house possibly become your primary residence? If so, read up on Section 121 exclusions.

Anything involving refinancing could be a good alternative, because it will relieve you of the time crunch involved with the strict 1031 exchange rules & time deadlines. If you borrow from a traditional lender, you will have to qualify & comply with their underwriting guidelines for non-owner occupied property (Income, Debt Ratios etc.) You have to plan very carefully & have your ducks in a row.

If you refinance & then exchange, you would still have to acquire replacement property equal to or greater than the total value of the relinquished property, to avoid "boot'.

I have learned to plan exchanges well in advance & utilize & other more involved strategies to prevent 1031 panic. ( I won't go into detail here, it is too much to type.)

Good luck.
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Brant Richardson
OP
Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
13y

I believe there is no estate tax until you inherit 5 million. But the house was bought for 125k and if sold for 700k I figure the government is going to want their capital gains tax unless I figure out some kind of strategy to use the 1031.

"Could the house possibly become your primary residence? If so, read up on Section 121 exclusions."

You'd think a 700k home would be a beautiful mansion but it is not. It is a crappy 2/1 built in 1915.

"If you refinance & then exchange, you would still have to acquire replacement property equal to or greater than the total value of the relinquished property, to avoid "boot'."

I absolutely want to reinvest every penny. I just know I can use 700k to get a much higher rent than $2150 per month.

"If you borrow from a traditional lender, you will have to qualify & comply with their underwriting guidelines for non-owner occupied property (Income, Debt Ratios etc.) You have to plan very carefully & have your ducks in a row"

This could be a problem. If I pulled 80% out of that house with a cash out refinance, I would be at about my limit of debt to income ratio for traditional financing. I might have to buy the new properties in cash, then refinance them after the main property sold.

"I have learned to plan exchanges well in advance & utilize & other more involved strategies to prevent 1031 panic."

These strategies sound interesting. Are there any books or other resource dedicated to this kind of thing? It would be a total panic trying to buy that much property.

Thanks for the help.
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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
13y
Hi Brant,

Ellis has a great suggestion there. You will likely receive a "step-up in cost basis" when you inherit the property. This means that the capital gain and depreciation recapture will completely go away. You can sell the property immediately after you inherit it with no capital gain or depreciation recapture taxes to worry about, and therefore will not need to worry about structuring a 1031 Exchange transaction. I would verify with your CPA that you will receive a step-up in cost basis when you inherit the property and then plan accordingly.
Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.826 Reviews
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Mehran K.
Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
13y
Great topic and I'd love to get some confirmation of the step-up in cost basis. Maybe we can call upon the wise @Steven Hamilton II to shed some light!
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
bill is correct there will be a step up in basis if he actually does inherit the house now if it's getting to him before that individual passes away then he will not receive a stepped up basis you want the same basis of the person who originally owned it.
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Brant Richardson
OP
Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
13y
Wow, that is great news. I will consult a local CPA about the step up. Thanks for all the help.
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David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
13y
@Brant Richardson

If the value is $700,000, when you inherit it, and then you sell it anytime for $700,000, there would be no Federal tax owed, presuming stepped up basis.

But if that property was given to you the owner's passing there would be no stepped up basis. Presuming no other reductions to the capital gain it could be $700,000 minus $125,000 equals $575,000 capital gain for which the tax could 20 to 23% or $115,000 to $132,250.

You could save a ton of taxes and not have to do a 1031. I think that more than pays for your subscription to Bigger Pockets.
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