Thoughts on Doing a 1031 soon

5 Replies

I just purchased a duplex 3 months ago.  Bought for 169K, Loan left of 110K.  I would like to sell the duplex for 210K.  I am sure I can get this price as a duplex down the street in worse condition/lower rents just closed for right at 210K.

I want to do a 1031 and put the 100k down payment into a 4-500K property (financed) which should get me 2-3X better cash flow.

The numbers makes sense.  Sure risk is more, but I am not risk adverse.  Does this seem like a good strategy or should I just continue to collect my $900/duplex as cash flow?

Sure makes sense and that is how the real estate game is played

However, check with your CPA or others on this board.  For a 1031, you need to hold the asset for investment purposes for a certain period of time in order to qualify for section 1031.

Also - be sure you can find a replacement property that can help you accomplish your goals.  I see you live in Austin, it is a hot market where you'll get a good price when you relinquish your property but may have difficulty getting a good price on a replacement property.

Originally posted by @Jason Mak :

Sure makes sense and that is how the real estate game is played

However, check with your CPA or others on this board.  For a 1031, you need to hold the asset for investment purposes for a certain period of time in order to qualify for section 1031.

Also - be sure you can find a replacement property that can help you accomplish your goals.  I see you live in Austin, it is a hot market where you'll get a good price when you relinquish your property but may have difficulty getting a good price on a replacement property.

 Thanks.  I am from Austin and so is the property.  I will definitely talk to my CPA about the holding period and what I can buy.  I am tight on cash right now to buy something pricy.

I Prefer to buy in Austin as I live here but not adverse to going into the Dallas/SA/Houston Market.  I rather not go any farther out just in case I need to drop by the property.

I lost out on a Property outside of Austin in one of the above cities 1 month ago and part of the reason is I could not bid higher than asking b/c I was concerned of making the down payment.  I have some regret about this.  500K, 16 doors, all rented for 9k/mo.  I did the numbers and for 100K down, I would cash flow about 30K/yr

Hi Micheal

I am currently doing a 1031, so I am not an expert.  @Bill Exeter is probably the person to contact on here.

I have similar concerns as @Jason Mak . I think you need to hold the property for at least 1-2 yrs. I think you need to show intend to HOLD the property. Proof that you intended to BUY HOLD, not FLIP.

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We just sold our long-term buy hold out of state unit last wk, now we are looking for replacement.

The amount of DEBT we need to incur is our handicap. we made almost 100% appreciation and the market in my area is "cheaper".  I am having a hard time finding something that can service that new debt.

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to explain numbers work for me, I won't put our exact #:

We bought our unit for  $450K (2001) and sold it for $850K (2015)

It had a HELOC (home equity line of credit) which helped me buy 6 other units in its 14 yrs of ownership of $300K.

Making our Proceed about 550K (You have to take into account all the closing cost, I m just using simple math)

Originally I thought that only need to find something in the 550K, which was easy here and incur no debt.... BUT BP corrected me, if I did that I have to pay capital gain on the $300K. It's Called a BOOT.

So, we have to buy something in the 850K range, if we want to defer all the tax.

And the only thing that can service that kind of debt here is a $1M property... LOL I have to take on $500K debt......

To be continued...LOL 

Fingers crossed:

it's either buy  one $1M commercial bldg, (Cash flow, but incur a lot more debt)

buy multiple multi units, and end up with 20+ doors in a short period of  time barely cash flowing, with $300K mtg to service

buy multiple single family, and end up with a handful of property and barely cash flow with $300K debt

It's a good problem to have, but still a problem hahahaha

@Michael Win Your hold time on the current property could be an issue but here's the reason why - There is no statutory holding period before you can do a 1031.  The requirement is you must be selling real estate that you purchased with the intent to hold for productive use in business, trade, or for investment and are going to purchase real estate that it is also your intent to hold for productive use....

Intent rather than holding period is the true standard.  But the shorter time you hold the property the harder it is potentially for you to demonstrated that your intent was to hold.  

That being said the rest of your plan certainly looks solid from a 1031 perspective.  You need to purchase at least as much as you sell and use all of the proceeds in the next purchase.  @Jason Mak is right about the timelines tripping you up.  From the day you close your sale, you only have 45 days to identify your potential replacements and 180 days to complete the entire process.  In a hot market these two requirements are typically the hardest to adhere to.

Originally posted by @Jason Mak :

Sure makes sense and that is how the real estate game is played

However, check with your CPA or others on this board.  For a 1031, you need to hold the asset for investment purposes for a certain period of time in order to qualify for section 1031.

Also - be sure you can find a replacement property that can help you accomplish your goals.  I see you live in Austin, it is a hot market where you'll get a good price when you relinquish your property but may have difficulty getting a good price on a replacement property.

Hi Jason,

There is no specific holding period required for 1031 Exchange treatment.  You can literally buy and then sell and 1031 Exchange the next day IF AND ONLY IF you can show that you had the intent to hold BUT a business or economic reason came up that changed your circumstances.

Short-term holds are more difficult to demonstrate that you had the intent to hold for investment purposes.  However, emails between you and your advisors, other correspondence, etc., that show you had the intent to hold for rental/investment purposes can go along way to documenting your intent. 

Sometimes, another/better property/opportunity can drop into your lap and the 1031 Exchange allows you to reposition your investment/put you into a better position.  You just have to show intent to hold for rental/investment (as opposed to held for sale like rehabs/flips).  Demonstrating and documenting your intent is key here.

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