to 1031 or not to 1031?

5 Replies

I own two properties where I live. I may have to move to another state where I have a property there.

Do I have to do a 1031 exchange to not pay taxes or can I just sell and buy within the required time frame?

Both properties on in 1 LLC.

Also, would I need to use a 1031 broker (?) or can I do this myself?

you need a QI, only  do a 1031 if you have something to replace it with. Don't force a 1031 if you can't find a replacement just to "save" on taxes.

You do need to use a qualified intermediary for a 1031 exchange. To complete a 1031 exchange, there are strict guidelines in terms of timing and documenting the property(ies) you will relinquish and acquire in the exchange. You can't just sell and then buy within the time frame. That is not a 1031 exchange. A key difference in a 1031 exchange is that this not a sale. It is an exchange. For purposes of an online forum (and even when I meet with clients), we use the words "sale" and "buy", but in actuality, Section 1031 is not a sale of a property. It is an exchange whereby certain rules have to be followed.

You should consult with your CPA and/or a qualified intermediary.

1031 permits various types of exchanges:

"There are three types of real estate 1031 exchanges that can occur:

  • Simultaneous Exchanges are where the relinquished property is transferred at the same time as the replacement property is received. With the exception of a direct trade between two property holders, a third party is needed in the transaction to facilitate the acquisition or sale of one of the properties and then completion of the exchange.
  • Delayed, Deferred, or "Starker" Exchanges are where the relinquished property is transferred prior to the time the replacement property is received. This trans-action requires use of a third party to sell and buy the properties involved, and to hold the proceeds from the sale of the relinquished property.
  • Reverse Exchanges are where the replacement property is acquired by a third party for the taxpayer prior to the time a sale has been arranged for the relinquished property. At some point in the transaction, the replacement property is simultaneously exchanged for the relinquished property, which is sold by the third party.

The third party referred to in these transactions is known as an intermediary or facilitator. That entity cannot be related to the exchanger as outlined in the Internal Revenue Service regulations, or the validity of the exchange is at risk. A professional real estate intermediary will provide the best service at a reasonable cost, and can work with the exchanger’s real estate and tax professionals to see that the desired results are achieved."

More than likely you will need some assistance from an intermediary as noted above. I have done a simultaneous exchange wholly on my own, but those are actually very rare these days and probably not recommended unless you have absolute and full control over all aspects of the transaction on both sides, and a fairly solid understanding of the governing tax provisions.

@Guy Yoes , It warms my heart to see so much good response so quickly.  I've been doing this for almost 20 years and it finally feels like the knowledge is starting to take hold.  Yep the 1031 is not a DIY by law and your intermediary has to be in place prior to the closing of your sales.

The LLC, unless it is a disregarded entity that doesn't file it's own tax return, is the taxpayer so it will sell and purchase in the 1031.

If you sell those property's to one individual on one contract then that could be treated as one exchange.  If it's two contracts and two closings it has to be two separate exchanges each with it's own critical dates and reinvestment requirements.

However, if you can make the dates work you can combine those two exchanges into one or more larger investment properties. 

Thank you. I am in no hurry to sell the properties I have now. My current properties are in great shape and have had the same renters since I bought them 5 years ago. They generate about $1500 per month after taxes and insurance. 

Both current properties together would value at 225K and the 2 duplexes I'm looking at would be about 375K total.  

Both SFH are paid for so I could REFI them to put down on the duplexes (my Idea) but my partner (wife) doesn't want to manage from out of state. We are 3 years from retirement and want to stay debt free.

That said, it sounds like the only way to avoid taxes and have more equity for the deal is to 1031 Exchange. 

The increased rent and our monthly contribution would pay the duplexes off in 3 years. 

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