How ot best navigate a 1033 Exchange

Question

Property was a (1) small mobile home park...land and trailers, (1) house and (1) mobile or RV ready rental lot. Of course I would like to keep some of the proceeds but...looks like I need to reinvest the full amount paid for the properties in to "like" property. I think I understand that all of the funds do not have to go into a single investment...but I am not 100% sure of that.

Thoughts please as to what kind of legal structure would work best for estate planning purposes, cash flow, etc.?

David Starr · Answer

@Dave Foster, sorry about the confusion between 1033 and 1031.  Looking back at my original post the first couple of sentences are missing for some reason.   I noted the buyout was due to eminent domain.

Dave Foster · Answer

@David Starr, The 1031 exchange will be your vehicle to indefinitely defer the tax on that sale.  Within the 1031 there are numerous replacement options that can be used for estate planning.

And actually in the park home sale there may be the opportunity (or requirement) for some of that to be cash to you.

Here's a couple quick thoughts

1. If you live in that home on site then that can be carved out as your primary residence and the proceeds allocated to that can be tax free to the limits of your primary residence exemption.

2. The 1031 exchange is only for the sale and purchase of actual real estate.  So depending on how your accountant has things allocated, some of that park could be allocated a personal property and some as real estate.  You can't 1031 personal property so that cash will come to you (but you'll pay tax on whatever is deemed profit).

3. The requirement to completely defer all tax in a 1031 is to purchase at least as much as you sell and use all of the proceeds.  But you can purchase less than you sell and you can take cash out - you just have to pay tax on the difference.  We call this a partial exchange.

So you do have some options to look at to put cash in your pocket and still defer a bunch or all of the profit.  And yes, you can purchase multiple replacement properties.  That allocation will be a key part of your estate/retirement planning. Delaware Statutory Trusts are a very popular product as part of the package as @Paul Moore said.  Folks like them primarily because they are 1031 compliant yet a passive form of investing.  And an often overlooked benefit is that DST's convert personal recourse debt that you may have on a property to non-recourse debt where you are no longer personally liable.  This is huge for retirement planning.

Buddy Holmes · Answer

@David Starr

I don't think anyone answered your question on the house, Trailer and RV or RV ready lot.  If they were rentals, then I think they are also part of the 1033.

If they were just private property sitting in a mobile home park, then I am not so sure.  If the trailer and home were rentals, i think that gives you the best case for a wider "like kind" replacement like the DST's mentioned.

The nice part of the 1033 is you don't mess with mortgage matching. So if your property was paid off or low mortgage then you can match the reinvestment with mortgaged property at perhaps 75% L/V or the DST with L/V of about 60% or less.

So you can keep some cash that way without the  tax bite.

The DST do require you to be an accredited investor, and I think your would have to stick with Apartment complexes (like kind residential property), or Mobile home park (I don't know if there are DSTs for these). I think that the DST for office complex, industrial and other triple net commercial property would not be considered "like kind for the 1033 where it would be for a 1031 exchange.  I am not an expert but have read as much as I can find on the 1033 subject and have done a couple 1031 exchanges.

Hope that helps.

David Starr · Answer

""How passive an investment do you want? Since you have time if you go down the DST

route, diversify (ie instead of 1 * $1M buy, do 10 * $100K buys) and

then stagger them so they don't all renew at the same time."..from Steve Morris

Thanks Steve.  Yes, diversification, in my opinion, is normally a good plan.  I'm an old farm boy and the "all your eggs in one basket" and "money is like fertilizer...works best when you spread it around" are life lessons I've seen up close...lol

Dave Foster · Answer

@David Starr, Claro - I thought it was just a typo since there was no mention of the total loss or forced conversion that are required parts of a 1033.  The same replacements that qualify for 1031 would qualify as like kind replacements in a 1033.  And I think there's still the opportunity to replace the personal property with like kind as well.

Steve Morris · Answer

"I'm interested in other/more strategies if you have them. TheDST that both Paul and you mentioned definitely sound interesting."

How passive an investment do you want?  Since you have time if you go down the DST route, diversify (ie instead of 1 * $1M buy, do 10 * $100K buys) and then stagger them so they don't all renew at the same time.

David Starr · Answer

Thanks Dave and Paul @ Paul Moore for your weighing in on this.

To be clear I am looking at a 1033 not a 1031 but I assume they are similar.  I understand a 1033 gives me from 2-3 years (eminent domain transaction) to comply and hopefully identify a few other options.

I did not live on the premises nor occupy any of the units.

So as personal property the mobile homes will not be part of the 1033 calculation?

I’m interested in other/more strategies if you have them.  The DST that both Paul and you mentioned definitely sound interesting.  David Starr

Steve Morris · Answer

Do you mean 1033 exchange?  Some govt is going to condemn your property and pay you?

A 1033 gives you a lot more time and options than a 1031 so it'd be worth investigating.  I've only seen one prior and the guy had like 2 years and the only metric was buying something more expensive (debt or equity didn't matter).

Paul Moore · Answer

Hi @David Starr.  You don't need to reinvest in a single property. Almost all real estate is "like-kind" and in general, the type of entity is less important than the asset type.  I look forward to seeing a reply from @Dave Foster here.  And if you run out of time, you may want to consider a Delaware Statutory Trust. Wrote on that here: https://www.biggerpockets.com/blog/create-massive-wealth-delaware-statutory-trust

How ot best navigate a 1033 Exchange

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