Looking for next step! 150k to reinvest. 1031 Exchange.

Member since 2022 · 5 posts · 0 votes

Hi All, I have a property that I am planning to do a 1031 exchange with and it looks like I will have about $150k to reinvest. How would you reinvest the proceeds?

My current thinking: In the area I live in you can get buildable SFH lots for about $20k, so my plan is to buy 6 lots combined with the 3 lots I already own I could build a total of 9 SFR homes on them, the goal would be to cash flow before taxes $500 per home ($4500 in total); I am also thinking of buying something commercial using the 150k as a 20% down payment, which would be a purchase price of about $750k.

I feel like this reinvestment will really shape the future trajectory of my RE business any advice? Thoughts? Comments?

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Brian G.

Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes

@Stefanie Gray my understanding is the IRS considers all "Investment Properties" to be "Like-Kind." Properties do not need to be the same type. For example, raw land can be exchanged for an office building, a warehouse can be exchanged for NNN retail property, or a rental house can be exchanged for an apartment complex. Maybe @Dave Foster can confirm this as he specializes in 1031 exchanges.

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Bjorn AhlbladPro Member
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
3y
@Kevin T. If it were me I would steer away from building anything, by the time you have drawings, zoning, permits etc, It will be two years before you are ready to sell or rent, and who knows where we will be then.
Perhaps consider selling the three lots and having an even bigger downpayment for a MF with as many doors as you can get in a reasonably decent property. Just my thoughts. Congrats on your dilemma!
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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
3y
Say you have $150k to invest in 1031. Is that your total net sales price? (The amount you have to purchase to avoid taxes.) or is that the cash your QI will receive for you to use as your downpayment? (Remember you can’t touch the money, buy less than your net sales price, or keep any cash without paying taxes.)
If you get $150k and you only have to spend $150k because it was paid off. That is way different than selling a $1mil property and getting $150k. You’d have to come cash out of pocket for the downpayment.
Almost zero chance I’d use it to buy land unless it’s being given away. The economy, the interest rate, the build costs, and the value difference between new and existing will all be unknowns.
I assume there was a problem with this property you’re trying to solve by selling, what was it? That may help point at an ideal replacement.
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Tim Ryan
Investor / Mentor / Contractor · Arcadia, CA Buying Out of State · Member since 2015 · 654 posts · 622 votes
3y
You seemed to gloss over the "build 9 homes". I'm a builder, and that's a really big deal especially since you'd need to finance all the construction? So, my advice is for you to find a commercial property and use the $150k as down payment. It will be a good step and make some cash flow (not $4500) but will put you on your path to real estate success. Now, to find the $750k building...
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y
@Kevin T., unless you can't find a good commercial replacement for your 1031 I too would steer away from simply buying a bunch of lots. $20K lots will always be available. No reason to bank them at this time. And unless you've got deep pockets you'll only be building one or two at a time. A lot of banks like to loan in twos. This makes it a pretty easy way to use cash flow from your 1031 purchase to buy two lots. And then use the lots as your down for the construction loan from the bank.
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Stefanie Gray
Real Estate Agent · Irvine, CA · Member since 2023 · 9 posts · 0 votes
3y
@Kevin T., is your current property a residential SFH or MF (1-4 units); or is it a commercial property over 4 units? Just asking because with a 1031 exchange, one of the rules is that the subject property has to be a "like" property to the one you are trying to get the tax deferment on. Be sure to talk to your tax professional. Hope you find what you're looking for!
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Brian G.
Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
3y
@Stefanie Gray my understanding is the IRS considers all "Investment Properties" to be "Like-Kind." Properties do not need to be the same type. For example, raw land can be exchanged for an office building, a warehouse can be exchanged for NNN retail property, or a rental house can be exchanged for an apartment complex. Maybe @Dave Foster can confirm this as he specializes in 1031 exchanges.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y
Absolutely correct @Brian G.. Any type of real estate used for investment can be exchanged for any other type. All types of real estate are considered to be like kind. And all real estate that is held for productive use in trade, business, or for investment is considered to be 'qualified use" properties.
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Jake AndronicoBusiness Member
Realtor · Reno, NV · Member since 2019 · 1k+ posts · 938 votes
3y
@Kevin T.
Definitely talk to a CPA.
Building 9 homes is no small feat, and you're timing is unlikely to pencil out.
The last thing you'd want is to have a huge tax bill and a failed project.
Don't mean to be a debby-downer, but also wouldn't want to see you lose a significant chunk of what you've built up in equity (great job btw).
Remember: It's a long game.
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