All Forum Posts by: Dave Foster

@Denise B.

@Bill B. Bingo! Yeah, as long as you file jointly, the name won't be an issue since you file a joint tax return.

When doing a consolidation exchange, you want to be mindful of the time frames since the clock starts at the sale of the first property. The best way to do this is to negotiate as extended a closing as you can on the first property to go under contract. This will allow you more time to get your second property sold and cluster the time periods more closely.

You would naturally have to sell your relinquished properties before taking title to your replacement property, but nothing says you can't go under contract for your replacement property right away or after the first one goes under contract to make things smoother.

@Sridhar Das, Like @Sam Cohn mentioned here, a 1031 exchange would allow you to defer all of the tax and depreciation recapture.

Investors looking to scale their RE portfolio will use the 1031 exchange and allow that tax to work for them by reinvesting into larger or multiple investment properties, using the BRRRR strategy.

The 1031 exchange allows you to invest in any type of real estate as long as it is held for investment use. the 1031 is a great tool to team with cost segs and BRRRR to maximize tax savings and give you maximum growth potential.

@Kevin Meyer, you absolutely can. As long as the portion you are using for investment is at least as much as the net sale of your old property you'll still defer all tax. And the extra unit is perfectly fine to live in.

These types of small multi family loans (VA, conventional, etc) are perfect to use with a 1031 exchange. Because you get the benefit of lower down payment and advantageous interest. And you also get to use part of the property for your primary residence.

Here's the end game - After a year or two you move out, back fill a renter and buy another one. Or you sell and 1031 into a different property. The portion that you have lived in for the last two years will be tax free. And the 1031 will defer the rest of the tax into your new purchase (which just might be another small multi-family....)

@Brandon Seidel, You've hit the high spots

1. If you pursue this option you'll pay tax on an $800K profit plus depreciation recapture. That's not a small tax even in TX let alone what CA might want from you. A 1031 exchange would let you defer all of that tax. But you must purchase new investment real estate. You can't defer the tax if you buy your primary residence or stocks/etc.If you decide to sell the property, being that it's an investment property you will be able to do a 1031 exchange.

2. You're right to be concerned about the impact of a cash out refi. This almost never helps a weaker performing property. And in your case would almost surely make it a negative producing NOI property. If you can find a killer property to buy. And if appreciation stay's strong in Carlsbad then your Internal rate of return will be fine. But you'll have little cash each month to bank for expenses.

3. This is always an option. And it can be a good one - especially in CA, if you don't need a lot of cash flow. And if you're not trying to scale your portfolio.

If you want to scale and grow your investment real estate then this property is not a good candidate to hold. Your best bet would be to sell and 1031 exchange. A 1031 exchange would allow you to defer all of the tax and depreciation recapture, and reinvest it into a larger, or more and smaller property/properties with better cash flow. This is a great tool to scale up your portfolio using all of the tax to your advantage.

Thanks for that shout out @Jared Smith.  That's pretty much lays it out.  The one thing to add would be that @Gp G. will also have depreciation recapture on all of the improvements from the time they were made.  This would add to the tax bill. And there would also be the GA state capital gains tax.

It really becomes a value comparison - staying in real estate and doing the 1031.  But continue to have to chip away at the personal debt.  Or paying all of the tax.  But losing the interest payments on the personal debt (and the continued depreciation benefit and possible interest write off of the personal notes).

@Kevin Van Ness, I was just talking to your doppelganger this morning. The only difference is he is 36 with 600 units!! The greatest enemy to scaling is control - specifically giving up control. Whether you are scaling up a business or a real estate portfolio you will not be able to scale as effectively as you want until you are willing to give up control. The question is what do you want to give up control of. It sounds like you love sourcing deals, rehabbing and renting properties, and maintaining them. You can do all of that. But only to a point. Then you have to give up some control in order to maximize the momentum you want. Passivity can come but not without giving up control. The question is what do you give up. What can you give up? What do you want to give up?

There is a strategy known as a consolidation exchange, where you sell multiple investment properties to acquire a larger investment property in a 1031 exchange. This can create some scale as your dealing with the same dollars. But fewer tenants and toilets etc. If you took a few of your least-performing properties and started to consolidate your portfolio using 1031 exchanges, you could be reducing the stress of managing so many properties while using all of the tax to your benefit.

The strategy that we talked about this morning is to strategically begin to empty the hopper but only slightly faster than I can fill it. In other words, Keep growing the way you are by yourself. But systemically start to sell properties and 1031 into passive interests, or NNN commercial properties. You keep all of your tax deferral and depreciation benefits going. But each time you sell a property and 1031 into passive you give yourself margin to buy the next hands on project. You can keep your work-load right where it is or even lessen it while actually growing your income and net worth

@Nick Potohnick, Sorry you couldn't get answers to your questions.  There's a couple of things going on. And it's not all straight forward.  But. I think your only possibility would be a type of reverse exchagne if that could be. put together.

1. Your first scenario would not work because you would be trying to exchange into a property you own yourself.  That will not work.  There might be a possibility that you could exchange into the % of the property your partner owns.  But that will leave him possibly owing tax.  And there's still some related party issues to be sorted through.  

3. In your last scenario you would be doing a form of a reverse exchange.  Which is not prohibited.  But the IRS is awfully fond of the safe harbor exchange under Rev Proc 2000-37.  You'd be on your own with that as to structure etc. 

@Oscar Barbecho, I'd need to know a little more about the specifics of your situation.  But you may be a good fit to take some of the proceeds tax free with no need to reinvest if you were house hacking that property.  the rest of the proceeds can be used in a 1031 exchange so you can accomplish it all without paying tax at all.  If you are able to take advantage of both opportunities that will change your reinvestment requirements which might open up some different properties than you are thinking right now.

@Tony Thomas, You can actually go into contract on your new property at any time - even before you have closed your sale.  You cannot take title to your new property before you sell your old property.  But you can be under contract.  This eliminates a lot of the angst surrounding those time frames.

Since you have a full 45 days after your sale to identify your potential replacements that gives you some time to still identify another one even if the first one falls through.  Especially if you're already under contract for it when your old property sells.  You can change that list all you want until midnight on day 45 when it becomes fixed and cannot be altered.

So, it would be best for you to make day 45 your go/nogo day.  If you can't find propeties you like then do not turn in a 45 day list.  Your exchange will die on day 46 and you'll get your proceeds back immediately.  You will pay the same tax you would have at the same time.  There is no penalty for starting and not completing a 1031 exchange.

Another tip - As you're looking at getting contracts for your sale and purchase - make them "assignable" contracts.  that will keep the 1031 exchange anonymous.  But let us or your QI perform everything they need to complete the legal requirements of a 1031 exchange.

Lastly, I'd recommend starting your journey with your QI for the 1031 sooner rather than later.  There is a whole lot of nuance.  And a lot of opportunities and pitfalls inside a 1031 exchange.  The better prepared you are before it starts the better your exchange experience will be.

@Miguel Hernandez, Most growth oriented 1031 investors would be looking to sell this property and purchase 2 smaller ones. In general the smaller the square footage, the greater your NOI is per sq ft. So buying two $100K properties might net you $2000 a month (example only). While one $200K property only gets you $1700. It's. the same principle as multifamily which you're focusing in on which is good.

Your net cash might be a little tight to really take advantage of ramping up.  But you can always partner with someone to buy a larger multi-family or several smaller SFRs.  As long as you take title to at least as much as you sell ($185K ish).  And use all of your net proceeds ($104K ish) in the purchases you'll defer all tax.