Flipped my first Property now doing a 1031 and need advise!

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Flipped my first Property now doing a 1031 and need advise!

Tina Jenkins
Member since 2018 · 101 posts · 14 votes

I sold my 1st property a 4 plex. I am doing my 1st 1031 exchange. I bought it for 172.000 two years ago and slowly fixed it up. I sold it for 255,000 and close on Wednesday September 23rd of this month. My plan is to borrow 155,000 -165,000 due to a mortgage of 155,000 still owed to the bank. I need to do this to be equal or greater then 255,000 to satisfy the 1031 agreement. I want to purchase several properties at once mixed comercial. Mine and my husband credit score is great and we both work. Im not too worried there. My concern is I have never applied for a blanket loan and really don't know where to start. I am looking at 4 properties 1 house 1 duplex with a commercial office space could be a store front and 1 restaurant. I have reasons for each of these purchases. Does anyone know of a good lender that will not rip my off on the interest rate for something like this or is it better to do separate loans?

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
6y
Originally posted by @Tina Jenkins:

I sold my 1st property a 4 plex. I am doing my 1st 1031 exchange. I bought it for 172.000 two years ago and slowly fixed it up. I sold it for 255,000 and close on Wednesday September 23rd of this month. My plan is to borrow 155,000 -165,000 due to a mortgage of 155,000 still owed to the bank. I need to do this to be equal or greater then 255,000 to satisfy the 1031 agreement. I want to purchase several properties at once mixed comercial. Mine and my husband credit score is great and we both work. Im not too worried there. My concern is I have never applied for a blanket loan and really don't know where to start. I am looking at 4 properties 1 house 1 duplex with a commercial office space could be a store front and 1 restaurant. I have reasons for each of these purchases. Does anyone know of a good lender that will not rip my off on the interest rate for something like this or is it better to do separate loans?

 If you are planning to do 1031 on the sale of this property, then you are already late if you have your closing scheduled. 1031 needs to be coordinated with QI if the exchange is nit simultaneous, which is rare for for real estate

Also if this property is a flip then you cannot do 1031 anyway. I know it took you long time to get this ready but from what you say your intention was to flip this to begin with.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    6y
    Originally posted by @Tina Jenkins:

    I sold my 1st property a 4 plex. I am doing my 1st 1031 exchange. I bought it for 172.000 two years ago and slowly fixed it up. I sold it for 255,000 and close on Wednesday September 23rd of this month. My plan is to borrow 155,000 -165,000 due to a mortgage of 155,000 still owed to the bank. I need to do this to be equal or greater then 255,000 to satisfy the 1031 agreement. I want to purchase several properties at once mixed comercial. Mine and my husband credit score is great and we both work. Im not too worried there. My concern is I have never applied for a blanket loan and really don't know where to start. I am looking at 4 properties 1 house 1 duplex with a commercial office space could be a store front and 1 restaurant. I have reasons for each of these purchases. Does anyone know of a good lender that will not rip my off on the interest rate for something like this or is it better to do separate loans?

     If you are planning to do 1031 on the sale of this property, then you are already late if you have your closing scheduled. 1031 needs to be coordinated with QI if the exchange is nit simultaneous, which is rare for for real estate

    Also if this property is a flip then you cannot do 1031 anyway. I know it took you long time to get this ready but from what you say your intention was to flip this to begin with.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Tina Jenkins. I agree with @Ashish Acharya, that you're late to get the most out of the planning for your 1031 and in particular getting lender recommendations from that QI.  But if you haven't yet contracted with a QI you're not too late.  All that is required is that the QI be in place prior to the sale.  So anytime prior to the sale.  But watch out for grumpy title companies.  That's who gets the most frustrated when a 1031 is sprung on them at the last minute.  We're used to the "Oh shoot" moments.

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  • Tina Jenkins
    OP
    Member since 2018 · 101 posts · 14 votes
    6y

    @Dave Foster

    Ok Dave thanks for the reply I guess I shouldn't call it a flip then since my intentions where to hold for retirement. I have contracted already with a QI. The title company already knew about it and I am just trying to figure the loan part out. My 45 days to name the properties start next week.

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  • Glenna Wood
    So MD · Member since 2019 · 294 posts · 191 votes
    6y

    Just an opinion as I've not worked with commercial loans as I only buy land or residential RE... I've always done individual loans on exchange properties and just figured out the numbers mix between the 1031 proceeds, the new mortgages, and the amount of equity going into each property vs their future income. If it's a package loan it seems like it would be more involved to refi or sell one of the four in the future because each was offered as part of the collateral.  

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Tina Jenkins, @Glenna Wood a good bank will cross collateralize but also give you partial releases.  That is the key to making that loan.  Any time you want to sell a property you pay a certain amount down on the loan and they release it as collateral for the portfolio loan.  Without that it will be a nightmare for you.

    The QI is hopefully treating this as one exchange which will greatly lower the exchange costs.  But along with that it is totally up to your accountant to assign basis from the old property to each of the new properties.  That determines your starting basis in those properties, the allowable depreciation remaining and the probable gain if and when you sell one or more.

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    6y

    Don’t forget. You probably don’t want to identify 4 properties unless you are absolutely positive that you can and will buy all 4. Three properties is usually the magic number. I BELIEVE, if you identify 4 you’ll have to buy all 4 for your 1031 exchange to qualify, even if it’s not your fault that you buy less than 4 (seller changes their mind, someone else pays more, your inspection finds a massive sink hole, whatever). @Dave Foster will have to pop back in before your close to confirm or deny my theory. 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Bill B., there's actually a 2 level rule for identifying potential replacements That @Tina Jenkins QI will need to guide her through.  Identify less than 4 and their value doesn't matter.  Identify more than 3 and their total value an't exceed 200% of the value of what you sold.  Unless you actually purchase 95% of the value of the list  which generally will require you to actually purchase all of the properties on your list.  There's a lot of folks that will name 4 or more.  Usually they're careful to keep the value under 200% of what they sold.  The other option that they'll choose is to close on everything they want during the 45 day period.   Then by default the list simply becomes the properties they've already purchased.  Tricky but can be done.

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    6y

    Thanks @Dave Foster. I think I knew that but never considered it relevant as I was always considering exchanging in to a more expensive property. So even identifying 2 properties was over the 200% rule. 

    Do they allow him to exchange in to a house hack by the room situation? Or is it considered 100% personal use if he's living in the only "unit" (like a large SFR.)

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Bill B., It could be handled either way.  The burden of showing investment intent would be higher when it's just rented rooms inside a personal residence.  But the biggest factor for me would be that as long as you're renting rooms inside the main structure it is still possible to consider that your primary residence and simply report the income..  So it would qualify for the 121 exemption.  

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  • Tina Jenkins
    OP
    Member since 2018 · 101 posts · 14 votes
    6y

    @Dave Foster

    Hi Dave I am so thankful for all of your info. I have a 1031 agent but he will not answer any of my questions I told him I understand its not advice and I just want to know the rules but he keep emailing me back that he cannot give advice ugh. I think I got in over my head on this one I have been researching and trying to understand everything but its all just happening so fast. I have put in requests to several lending institutions I did not apply yet just requests info on the types of loans that would best fit my needs.

    If you would be willing to speak with me inbox me and I will give my number.

    Again thanks for your welcomed advice.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Tina Jenkins, That is a tough situation to be in.  The barriers to entry for a QI aren't high.  But the difference between those many good ones who know the law, aren't afraid to communicate the law, and are there to truly be your guide through the process  and the person who knows how to print forms, dodge liability, and make a cool web site is vast!!!

    No one's going to be able to give you definitive answers that rely on your tax returns or personal knowledge of your individual situation.  That's a job for your close financial and legal advisors.  But the things you're talking about are 1031 - 101 (sorry I've already forgotten the person who uttered this phrase a few weeks ago - perfectly timed my anonymous friend). The regs of 1031 have nothing to do with you personally and they absolutely are the QI's responsibility to articulate to you in such a way that you can determine where your personal situation lies.

    That is I think the essence of this debate - A good QI knows the law and should explain the law to you and make sure you're doing nothing against the law.  It is up to you to determine where. your situation falls in the relation to that law.  It doesn't sound to me like they are communicating the law to you effectively.

    You and I've made contact.  We'll take it from there.  

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