Should I do a 1031 Exchange or not

4 Replies

So I have a house that I purchased from another landlord in April of 2015. I purchased the property for $17,600 but I currently owe $19,664 on the house. Well a few months after buying the house the tenants that I "inherited" stopped paying so I ended up having to evict them. Now I have a cash offer from the neighbor to purchase the home for $28,500 so I've decided to sell it to him because its a one bedroom house that probably will be hard to rent out anyways. Should I do a 1031 exchange or not on this because I know its costs some money to do a 1031 exchange. Please help!!!!

@Ben Packwood , You've got some decisions to make.  Here's some factors to use for making that decision.

1.  Holding period - You're holding period is very short (less than a year) which could lead to questions if your exchange is ever audited.  There is no statutory holding period but you must be able to demonstrate your intent to hold the property for productive use.  So the longer you hold it the stronger the demonstration of intent.  That's the downside of your situation.  The upside is that from your post it seems that you bought it to hold and are now changing your mind only because you had tenant problems and your neighbor made an unsolicited offer to purchase and the return is healthy enough that it is prudent to consider it.  Nothing is certain other than your knowledge of self.

2. Your tax iiability is probably going to be around 2000 - 3000 or thereabouts.  So there are some savings potential.  But it might be worth your while to also look at the improvements and unrecognized expenses made if any.  Those would increase your basis and reduce your gain.

3. In order to defer all tax on the 1031 you'll need to purchase at least as much as you sell and use all of your cash proceeds.  In your case that means that you need to purchase at roughly $28,000  (or your net sale before mortgage pay off) and you'll have about 9,000 in cash to do that with.  So you'll be looking at getting another loan or putting additional personal cash in to make the 1031 work.

Those are probably your biggest considerations.

Thanks a lot Dave. That makes this easier to understand for me and helps me to make a decision on this. I appreciate it!

@Ben Packwood Your profit is going to be so small, I wouldnt even bother with the hassle of doing a 1031. It probably isnt worth the hassle to save the money in taxes.

@Russell Brazil that's what I was thinking to after looking at this some more and talking to a local title company. A 1031 exchange sounds like a good option if I have get a larger profit down the road though. Thanks!

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