1030 Exchange vs LOC payment

[Rick Klopp]

Considering two options for an upcoming sale. Back story - I made a purchase of a SFR back in February for $5,500 (not a typo) that required significant renovation. I put it back on the market for $17,500 and just received an offer for $13,500 and accepted it. It's in an appreciating market and all I did was hang a "No Trespassing" sign and cut the grass once. Back to my two options - [1] conduct a 1031 exchange (not a huge amount and there are fees but every dollar counts) or [2] use the proceeds to pay down an existing Line of Credit running at 7%. I've ran the numbers several times and have come to a reasonable conclusion - just wanted to get some other insight. Thanks.

[Rick Klopp]

Some additional information - I use the word “sale” although I understand that option [1] is actually an “exchange” and I have located other potential purchases (should I go that route). Those are always questions. Thanks.

[Wayne Brooks]

it likely doesn’t qualify for a 1031.....you would have to show you intended to hold for long term, more than a year or two, then something changed to make you want to sell it.  With never having rented it, a really tough sale.

[Rick Klopp]

@Wayne Brooks

Thanks for the reply. I have a construction business and original intent was to do the rehab and turn it into a long-term rental.

[Jon A.]

I was under the impression you had to hold it and rent it for 2 years. This would be a personal income tax gain.

[Mark Creason]

A minimum holding period is not required.  The key is your intent.  If you buy and flip every property you buy, then will be hard to show intent to hold.  If you fix and hold everything, might have a legitimate argument that your intent was to hold.

[Bill Brandt]

Your own post says you didn’t intend to rent it...

“All I did was cut the grass once, post a no trespassing sign and put it back on the market...”

There was zero intent to rent it out. 

Ps. You’re talking about spending $1,000 to delay $2,000 in taxes? Not avoid, just delay. 

[Isaac S.]

1031 exchange to delay taxes on a $8500 gain? I am not an accountant or an attorney but, that seems to be much more trouble than it's worth...am I missing something?

[Rick Klopp]

@Bill Brandt the original intent was to rehab later this year and turn into another rental but with nearby houses selling, I decided to put it on the market.

[Rick Klopp]

@Isaac S. Not missing anything. I'll probably use the funds to pay down the LOC. Just asking others for their opinion. Thanks for your viewpoint.

[Rick Klopp]

I have decided to use the proceeds to pay down my LOC - thank you for those who responded. I always look for constructive feedback.

[Isaac S.]

Originally posted by @Rick Klopp:

@Isaac S. Not missing anything. I'll probably use the funds to pay down the LOC. Just asking others for their opinion. Thanks for your viewpoint.

 Hey Rick,

Actually it didn't dawn on me at the time, but, your post does raise a very interesting hypothetical....at what amount does it stop making sense to 1031? Like any gain under 20K, 40K, etc...I am sure that the number will change depending on individuals income and requirements for having flexibility with the capital and probably a couple other factors, but, I am curious to know of any investor that have a formula or threshold for determining if they should 1031 or just take the gain

Anyway, best of luck and thanks for the post!

[Dave Foster]

@Isaac S., That's kind of like asking the question of How much money is it worth walking across the street to pick up of the ground".  Some folks won't stoop down unless it's a bill.  Some would for a penny.  There's the financial side that says that if you're going to reinvest in real estate anyway any net savings over the cost of the exchange is worth it.

But you gotta factor in your time and energy and any extra effort you perceive as well.  I've had clients pay tax of nearly a hundred thousand dollars because the stars didn't align and they were busy.  I had a client once sell a lot with a $9000 gain and she was adamant to do the exchange.

[Isaac S.]

Originally posted by @Dave Foster:

@Isaac S., That's kind of like asking the question of How much money is it worth walking across the street to pick up of the ground".  Some folks won't stoop down unless it's a bill.  Some would for a penny.  There's the financial side that says that if you're going to reinvest in real estate anyway any net savings over the cost of the exchange is worth it.

But you gotta factor in your time and energy and any extra effort you perceive as well.  I've had clients pay tax of nearly a hundred thousand dollars because the stars didn't align and they were busy.  I had a client once sell a lot with a $9000 gain and she was adamant to do the exchange.

Haha....but, let's face it...walking across the street is a lot easier than doing a 1031.

I guess for the rational its down to how much you value your time(like you said), how patient your upleg seller is, and how badly you need the cash flow.

I get the point about the longer you can use the would be tax money to compound returns, the better!

Thanks for your perspective, you have replied to my posts about this topic in the past and I see you all over the forums, always generously sharing sensible and accurate information.

[Dave Foster]

Thanks @Isaac S., although I'm not sure I totally agree that 1031s are harder than walking across the street.  I live across the street from the beach.  And it's anything but easy crossing Gulf Blvd.  Kind of like my own personal version of Frogger with only one life !! :)

[Mark Creason]

@Isaac S.

Depends on the street.  Completing a 1031 isn't that hard.