Considering doing my first 1031 - any advice?

Question

We were accidently land lords - a relocation from work had us renting out our home. I am now considering doing a 1031 exchange to accomplish a few things:

1. My cashflow has trickeled to almost nothing due to increased tax burden. I would like to cash out and invest the proceeds to increase the cash flow.

2. Selling the property will allow me to establish full VA funding eligibility again.

How do I find my next property? The real estate market is crazy right now - which is good for selling and not so good for buying. Is there a good rule to estimate rental income on new property? Any other advice?

Bill B. · Answer

If it was your primary for at least 2 years and it hadn’t been a rental for 3 years yet. Just sell tax free. 1031’s just defer taxes you’ll still owe later.

Doing a cash out will defiantly not increase your cashflow it will decrease it.

If you do a 1031 you’ll have to buy something more expensive than the one you sell, reinvest all the cash and borrow at least as much. And don’t do the cash iTunes right before the 1031.

Dave Foster · Answer

@Dustin McClure, You're in very good company.  There are tons and tons of investors out there who started out just like you - as accidental land lords.  Here are some keys to completing a 1031 exchange in this kind of market.

1. Start early with your planning. Both understanding the requirements of the 1031 process and getting your replacement strategy as far down the road as possible.  The exchanges I see fail most often are where the investor isn't laser focused on their next target so they get paralysis by analysis trying to decide what to exchange into and where.

2. That being said focus on the most difficult job first - finding your next property.  You want to be as far along in the replacement process as you can during the 45 day identification period. As a matter of fact if you can - get your new property under contract even before you close the sale of your old property.  That is fine and can eliminate some risk.

3. And lastly - Don't despair.  Yes, 45 days isn't a lot of time.  And there will be folks who tell you they see "most" or "tons" or "many many" exchanges fail because of the tight time frames.  But it truly is more perception than reality.  We do internal audits periodically and even in this crazy sellers market over 90% of our clients are completing their exchanges with properties that they like.

You'll love the power to take the deferred tax and make money off of it for yourself!!