1031 Exchange into Different States

9 Replies

Hi all,

I purchased a 2bd/1.5br townhome in Summerville, SC nearly two years ago and am thinking about selling it and using the capital gains to invest in Seattle, WA, where I'm living. The townhome is currently estimated at over double my purchase price, so there will likely be substantial capital gain once it sells. I would ideally like to defer paying taxes on the gain and roll it into an MF property in Seattle so I can stop paying rent and house hack. All that said, I have a few questions about the process below:

1. Can I use money in a 1031 account for a down payment on an FHA loan? If not, can I use it for a 10% DP, or does it have to be a conventional 20% DP?

2. Will there be an additional taxes incurred from bringing the capital from SC to WA?

3. I haven't listed my townhome yet nor have I found a property in WA. Should I do a Delayed 1031 exchange?

4. What's my window of opportunity? 45 days from my sale to go into escrow with another property?

FHA is for owner occupied only and you can't 1031 into or out of a primary residence.

Going out of state causes no tax issues.

You have 45 days to Identify the replacement property to your QI and 180 days to close...no time limit on entering a contract but the earlier the better (preferably before you even close on the sale end), since the first one may fall apart.

@Dave Foster knows a thing or two about these and he would be a good one to use as your QI.

@Ryan J. Shope ,  Keep in mind the parameters to fully defer all tax and depreciation recapture - you must must purchase at least as much as you sell and you must use all of the proceeds from the sale.  So..

1. You can use the money as a down payment on something bigger. or split the proceeds on two or more properties. The LTV doesn't matter as long as you end up using all of the proceeds in the purchases. But you will have an issue with a traditional FHA financing. This is reserved for purchase of a primary residence. And since you can't use 1031 proceeds for the purchase of a primary residence this would probably get caught by the underwriters or the QI. Even if it didn't you could end up faced with the unenviable position of telling the IRS and the lender that you had lied to at least one of them :( . But as long as the loan can be for investment property any type of loan is fine.

2. The 1031 is specifically designed to allow you to exchange properties anywhere in the US.  So other than your closing costs and things like financing or normal transfer taxes if you do a complete 1031 exchange you will have no tax on the gain.

3. A delayed exchange is just another name for a regular 1031.  This is still the process where you close the sale of your old property.  and then within the time limits talked about below you . purchase your new property.  

A reverse exchange is an exchange where you have found your replacement and have to close on it before you close your sale.  These can be great ways to mitigate risk in a sellers market.  But while the cost of a regular exchange is $750 - $1000, a reverse exchange will add another $4000 - $6000 to that cost.  So you're probably better off just trying to sell your old property and using a regular 1031 exchange.

4. From the day of the closing of your sale you have 45 days to identify your potential replacements.  You don't have to have your new property under contract.  But the list goes hard after day 45 and cannot be changed.  So I usually recommend that you get the property at least under contract during the 45 days.  You can even go under contract for your new property before your old property closes.  You just can't close on it until your sale closes unless you're doing a reverse exchange.

@Dave Foster , Thanks for the detailed response! What do you mean by normal transfer taxes in point 2? How do I pinpoint what the cost of a regular exchange is? Is $750-$1,000 just a standard brokerage fee or is that a federal filing fee? 

@Ryan J. Shope , your title company can give you a disclosure list of costs of a sale or purchase.  Some states (or even municipalities have a fee for transferring a deed.  Sometimes it's called things like a transfer tax or doc stamp tax etc.  

The cost of a 1031 exchange is not regulated by the fed.  The $750 - $1000 is a market range for the typical national QI service. = https://www.biggerpockets.com/blog/how-much-does-a-1031-exchange-cost