which is better, 1031 exchange or take the money and run

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which is better, 1031 exchange or take the money and run

Rich Weese
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

99% of the respondents will select 1031 exchange. If you know me very well, you know I march to the beat of a different drummer. I also like to play the contrarian.

If I decided to part with one of my 150 unit apartment buildings, the logical decision is to complete a 1031 exchange. I actually purchased two buildings using a 1031 exchange from a storage facility in Florida I sold. I understand how they work. Here is my question:

Do I really want to sell a large ridiculously priced property using a 1031 exchange for a larger ridiculously property? I need to determine what other options are before I make that decision.

1. I could put it in the bank and make nothing.

2. I could purchase bonds like many of the financial geniuses are recommending.

3. I could try and I'll approach that I have been using on SFR S.

I've owned quite a few single-family residences free and clear. Over the past three years I have been selling them. I furnish owner financing. It is amazing how many people have money but no credit. The homes I've been selling have been in Rio Grande Valley, Texas. It is a very high percentage of Hispanic residents. I have been selling those homes at 9% – 9.5% interest, amortized over 30 years with a 10 year balloon. The buyers had adequate down payment and great income or owned their own job or.....  I had owned those homes for a while and the appreciation has not been very good in that area of Texas.

It is passive income with a collection company handling the collection and disbursement of payment ,whose services are paid by the buyer. The loans are PITI and tenant pays insurance and lists me as insured.

Back to the apartment building. I would end up with a big stack of cash that I could sit on and wait for the next correction or crash in real estate. I could also offer financing on properties I did not own. I'm confident there are buyers out there that do not have the credit for an institutional loan and are able to pay 9% – 9.5% interest.

I would not do this on expensive homes. I would assume the median priced home in Rio Grande Valley is under $150,000. I have one in escrow right now that sold for $123,000 at 9% interest.

I guess the question comes down to what are my thoughts about correction or recession. My age also figures in where I am already collecting Social Security and have adequate reserves to live on. I would just like to make a good play and the right decision.

Has anyone else thought of this as an option? I realize the property must be free and clear to carry your own financing unless you are willing to try a wrap.

Thoughts?

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Most Popular Reply

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

@Rich Weese, interesting conversation.  Back to your original post, the reason 99% of the respondents would recommend 1031 is because they are not where you are in the investor life cycle, the risk/reward continuum, or the growth/depletion curve. And they're right just like the 1% who tell you to sell are also right.

The 1031 represents a powerful tool to geometrically grow your personal portfolio using deferred tax dollars to accomplish that growth.  99% of the investors on this site are in growth mode.  They are younger and in a more active phase of the their investing life cycle.  And they are affected more positively by rewards that pay off than they are risks that come true.

You're more in need of security than growth.  You rightfully should be looking at taking accumulated assets and trading high performance for higher safety.  And the move to passive from active investing is part of that discussion.  

The 1031 can get you there it just depends on how and when you choose to stop.  Do you want to provide estate planning and continue the tax deferred ride indefinitely?  Then 1031 into safer more passive instruments and stay there until you pass and let your heirs benefit from the step up basis.

Do you want to step back but be ready to play again if the mood strikes - not because you have to but because it's fun?  Then by all means pull some off the table, pay the tax, and be ready to deal again.

Or the middle road you're contemplating works well for a risk averse investor.  Selling your properties on owner carries stretches out your tax bill.  It also allows you to be more passive - you really are investing in notes but on properties you know intimately.

Doesn't matter whether it's a high priced guru or your neighbor across the fence. If anyone tells you there's one do all tool or secret - they're wrong! One trick ponies generally get retired early. So a bag full of REI tricks is the way to survive long term.

The 1031 Investor5137 Reviews
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  • Roman M.
    Investor · Miami Beach, FL · Member since 2016 · 486 posts · 216 votes
    9y

    it all depends on your goals, tax basis, gain, etc and why you want to sell. 

    If you planning to use the money to buy real estate in other areas then do 1031 exchange.

    If you tired dealing with tenants then do seller financing and you will pay gain tax on principal you receive.

    If you need money for other investments: maybe do refi cash out (loan is not taxable) or 1031 to another property then refi cash out.

    1Reply
  • Pari Thiagasundaram
    Lender · Fremont, CA · Member since 2014 · 292 posts · 102 votes
    9y

    How about investing in notes and get 12%,13%,14% or even more . If that works may be you can sell your rental and play the paper game?

    0Reply
  • Tim Holmes
    Canton Ms. Tacoma Wa. · Member since 2014 · 117 posts · 39 votes
    9y

    Sounds to me like you are a accredited investor. So if your first world problem were mine, I would 1031 into a Delaware statutory Trust. The DST invests in real estate and pays about 5% annually. No tenants, no toilets, no termites and no capital gains taxes.

    1Reply
  • Jairo Garcia
    Real Estate Investor · Murrieta, CA · Member since 2016 · 34 posts · 11 votes
    9y

    To echo @Roman M. it really depends on your goals. At the end of the day a 1031 exchange is simply a way to defer taxes to allow you to reinvest the entire proceeds into another investment. Contrary to what many people beleive, a 1031 exchange does not eliminate your tax liability, it allows you to defer the tax payment so that you can continue to grow your portfolio/business. Whether you do it now or later the tax man always gets his cut.

    0Reply
  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    9y

    @Pari Thiagasundaram

    I like your #'s better. Where do investors sign up?

    0Reply
  • John Verduzco
    Naples, FL · Member since 2016 · 37 posts · 25 votes
    9y

    As an investor that just took the calculated risk of spending $999 on a 1031 exchange option without actually finding the replacement property in time to complete the exchange, I still think the 1031 CAN be very valuable if the timing works on the sale and the replacement purchase.  In my case, I could have deferred about $57K in Capital Gains taxes, but in the end, it was way more important to purchase the right property (or properties) at the right time in the RE cycle.  That didn't happen and I "lost" $999.  We just weren't willing to lower our standards on a purchase.  One slight correction - I believe that deferring taxes via 1031 until death can avoid the tax man altogether.  If one dies with deferred Capital Gains tax, I am told it dies with you.

    2Reply
  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    9y

    @John Verduzco

    I had a 1031 in your area 18 months ago. I exchanged  Secure storage in Bonita Springs on Tamiami Trail for 300 units in Dallas. Worked out great. I'm comfortable with doing one for high priced property on the trade. I think my storage buyer changed it to a franchise. Do you know it? Across from the old boat night club.

    0Reply
  • Mark Gustafson
    Sioux Falls, SD · Member since 2013 · 68 posts · 15 votes
    9y

    @Rich Weese glad to see your posting again.  I missed you for the past couple of years !

    CHEERS  -  Mark G from S.D. 

    0Reply
  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    9y

    Thanks Mark. I have been welcomed back warmly. I appreciate it.

    HOW DO YOU ONLY HAVE 44 POSTS!!!!!

    0Reply
  • Chris Brown
    Professional · Stowe, VT · Member since 2017 · 15 posts · 13 votes
    9y

    From the sounds of it, considering the fact that you 1031 exchanged from a storage facility into the apartment buildings, your basis in the apartments may be quite low. In addition, I'm guessing you have been depreciating these assets during ownership. So, the combination of capital gains and depreciation recapture will likely result in a hefty tax liability. A liability that can be 100% deferred using 1031 and put back to work for you generating ROI.

    @Tim Holmes There are a variety of passive, replacement property strategies available to exchange investors that include DST's (Delaware Statutory Trusts) and TIC's (Tenants in Common). DST's and TIC's provide and opportunity to defer taxes, re-invest funds that would otherwise be gone, diversify an investment portfolio by asset class, tenant mix and location while eliminating the three / now four (thank you @Tim Holmes) T's.  Toilets, tenants, trash and termites. 

    @John Verduzco "Swap till you Drop". At death, heirs / estate will receive a stepped up basis thus eliminating capital gain liabilities associated with your exchanges.

    Finally, you could use 1031 to sell your apartment building and replace with single family investment properties.  Complicated, but doable and perhaps a conversation beyond the scope of this thread.   

    2Reply
  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    9y

    @Chris Brown

    I need to clarify a couple things. The building that I would be selling in Dallas was one I bought without coming from a 1031 exchange. The other two buildings were part of the exchange for the storage facility. You are definitely correct on the tax consequences. Not only capital gains tax, but we did a cost segmentation years ago so we have extra depreciation we have to recapture. We also have that wonderful 3.8% Obama tax from the unaffordable care act. I would rather be safe and get out a year or two early than wait too long and have the same correction we have had several times in my lifetime. I'm at an age where risk is not worth it and security is worth more.

    @Tim Holmes

    I may have to get more information from you on DST and TIC.

    @John Verduzco

    Thank you John. I'm aware of what the options are to exchange into from a 1031. There are quite a few options available that still qualify as a real estate exchange. I assure you that the difficulty and complication to exchange into single-family residences all within the same period of time would cause you a nightmare. It was a nightmare just to match up all the dates and amounts with exchanging one building into two. I like your statement of swap till you drop also. I'm not an accountant, but I believe some of the information you mention in your first paragraph is not 100% doable.

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    If you already have a nice stabilized asset that is performing nicely, easy to manage, and not leveraged to the hilt then doing nothing strikes me as intelligent behavior. KISS. I like to play the contrarian too ;-)

    0Reply
  • Jeff Tallard
    Rental Property Investor · Madison, WI · Member since 2017 · 16 posts · 12 votes
    9y

     I think if you find the right deal the decision is easier, you'll be inspired to exchange.   I don't think it's always a great idea to exchange just for the purpose of exchanging .  It all depends on the timing.  

    We did a few exchanges at the top of the market  in the early 2000s and the properties showed almost no appreciation for seven years,  and actually went down in value after we bought them.  

    It feels like we may be approaching another bubble if the bond market bursts and interest rates go up.  

    There is also a strong possibility of another government shutdown this summer due to upcoming budget issues .  Things of that nature tend to rattle markets.

    It might not be the worst idea to take some money off the table and sit back and wait. 

    That being said, if you find a fantastic deal to exchange into you might be able to maintain the value of your building even if there is a correction. 

    My 2 cents

    2Reply
  • Bart H.
    Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
    9y

    @Rich Weese I may have missed it, but is there any chance you own the apartment building outright?  or close to outright. 

    If so , any thought to doing owner financing of the apartment complex and charge 8 or 9% interest with a large non refundable down payment?

    That way, you get a steady stream of income for 15 or 20 years (or whatever the term you choose), and if there IS a downturn and they default, the worst thing that could happen is you end up with a cash flowing property back and you can sell it again later on.

    BTW, I wouldn't put my money in bonds.  Warren Buffet the greatest investor in history doesn't think much of them.

    @Rich Weese

    0Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    9y
    Take the money and put into syndications.
    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Jeff Tallard:

     I think if you find the right deal the decision is easier, you'll be inspired to exchange.   I don't think it's always a great idea to exchange just for the purpose of exchanging .  It all depends on the timing.  

    We did a few exchanges at the top of the market  in the early 2000s and the properties showed almost no appreciation for seven years,  and actually went down in value after we bought them.  

    It feels like we may be approaching another bubble if the bond market bursts and interest rates go up.  

    There is also a strong possibility of another government shutdown this summer due to upcoming budget issues .  Things of that nature tend to rattle markets.

    It might not be the worst idea to take some money off the table and sit back and wait. 

    That being said, if you find a fantastic deal to exchange into you might be able to maintain the value of your building even if there is a correction. 

    My 2 cents

     As the old saying goes: Do not confuse motion and progress.

    0Reply
  • Leslie Pappas
    Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
    9y
    Originally posted by @Rich Weese:

    Do I really want to sell a large ridiculously priced property using a 1031 exchange for a larger ridiculously property? I need to determine what other options are before I make that decision.

    Hi Rich, if you're an accredited investor who is seeking to defer your capital gains tax but doesn’t want to be a landlord anymore you might consider reinvestment into DSTs (Delaware Statutory Trusts). They are hands-off, institutional grade real estate investments, and they allow you the option to diversify. You can buy into institutional grade $50-125M projects with as little as $100,000. Professionals with decades of experience and very impressive track records do all the heavy lifting for you. You get potential cash flow, tax shelter and appreciation. Loans are non-recourse. 

    0Reply
  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    9y

    @David Faulkner

    I actually have three stabilize assets that are on autopilot and am at an age where security is more important than growth. I can take a lot of chips out of play and feel extremely secure but still be ready to swoop in like a vulture if we have another serious crisis.

    @Jeff Tallard

    I agree and I think the timing is bad currently. I'm not looking for a new property and I would only purchase in the Dallas area since it has been so good to me. I'm afraid it would be like an alligator that might take a chunk out of my leg any time.

    @Bart H.

    That is an interesting idea. I have one building with approximately 75% equity. I have played the owner financing game with single-family residences because there are so many people that have bad credit but are capable of making high interest payments. I don't see how of purchaser of a large apartment building would be able to make that kind of mortgage payment unless they were strictly looking for write off. Thank you. I guess under the right terms I probably would consider doing that. I prefer doing the single-family residences because I would always have a large amount of chips on the sideline that could go into something if there was a serious correction or recession.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Rich Weese, interesting conversation.  Back to your original post, the reason 99% of the respondents would recommend 1031 is because they are not where you are in the investor life cycle, the risk/reward continuum, or the growth/depletion curve. And they're right just like the 1% who tell you to sell are also right.

    The 1031 represents a powerful tool to geometrically grow your personal portfolio using deferred tax dollars to accomplish that growth.  99% of the investors on this site are in growth mode.  They are younger and in a more active phase of the their investing life cycle.  And they are affected more positively by rewards that pay off than they are risks that come true.

    You're more in need of security than growth.  You rightfully should be looking at taking accumulated assets and trading high performance for higher safety.  And the move to passive from active investing is part of that discussion.  

    The 1031 can get you there it just depends on how and when you choose to stop.  Do you want to provide estate planning and continue the tax deferred ride indefinitely?  Then 1031 into safer more passive instruments and stay there until you pass and let your heirs benefit from the step up basis.

    Do you want to step back but be ready to play again if the mood strikes - not because you have to but because it's fun?  Then by all means pull some off the table, pay the tax, and be ready to deal again.

    Or the middle road you're contemplating works well for a risk averse investor.  Selling your properties on owner carries stretches out your tax bill.  It also allows you to be more passive - you really are investing in notes but on properties you know intimately.

    Doesn't matter whether it's a high priced guru or your neighbor across the fence. If anyone tells you there's one do all tool or secret - they're wrong! One trick ponies generally get retired early. So a bag full of REI tricks is the way to survive long term.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    4Reply
  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    9y

    @Dave Foster

    I think this was an absolutely great reply! All the points that are in consideration were able to be explained by you. I am definitely now a risk adverse investor. I have been playing this game for four decades, have an adequate estate and had GST set up for my grandkids. I think I have pretty much decided to step back and be more passive. I did very well after the two big corrections that I have experienced. I was prepared to vulture and and was able to do that.

    Thanks again for your reply.

    0Reply
  • William BrownPro Member
    Wholesaler · Los Angeles, CA · Member since 2016 · 276 posts · 181 votes
    9y
    Allow me to offer a contrary idea to the contrarian: Sell the 150. Vegas. Roulette Table.
    [email protected]310-919-0587Podcast Guest on Show #371
    0Reply
  • Bob C.
    Investor · Littleton, CO · Member since 2012 · 20 posts · 0 votes
    9y

    We are also considering cashing out on a 1031 property. However we are waiting to see what President Real Estate Developer does with the capital gains tax rates. I'm guessing he will do something 'friendly' for real estate investors, hopefully next year.

    0Reply
  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    9y

    I wanted to post an update to this thread I started several weeks ago. I did ask for any interested parties in my apartment building to notify me. I furnished basic information and the interest started to be generated. I never asked for offers but they started to roll in. I want to thank all of you that were interested in the building. I have accepted an LOI that was countered back and forth several times. I did receive near full price with nonrefundable earnest money of a significant amount. I also have a backup LOI supposedly coming in today.

    There will be no 1031 exchange involved. Paying an enormous amount of taxes has never been my mode of operation, but I am more interested in security at the present time.I will begin to do research as to where and what I plan to do with the proceeds of the sale. If any of you have additional ideas, please reply.

    0Reply
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