1031? Or is there another way ?

[peteypp44]

My wife and I currently have 4 investment properties in a very hot and growing market

3 cash flow very well.
1 cash flows ok.

Goal:

We would like to sell the property that cash flows poorly and roll it into 2 properties or into a property that will continue to efficiently grow our wealth.
Increase our leverage.

Details:
Selling Price 425,000- maybe more
Less Cost 179,467 (what we paid in 2014)
Depreciation 31,234
Gain approximately 276,767
Loan value: currently 170k, we cash out refi 2 years ago.

Estimated long term capitol gains: 60-65 K o

After reviewing these numbers we started to look into the idea of a 1031 especially since we want to stay leveraged and invested.

Concerns:
I worry about being able to identify 1 property or 3 properties that will still be on the market during the 45 day period and then the 180 day period in order to fulfill the 1031 requirements.
I would like to use some of the realized equity to make large renovations on another one of my properties. Does a partial 1031 exist?

Thanks in Adavance!

- Too blessed to stress

[Larry Ragman]

No, you cannot use partial 1031 exchanges per se to pay for renovations on properties you currently own. However, there is nothing stopping you from exchanging into a new property and using the equity, perhaps in refi or equity loan, any way you wish.

If you don’t use an exchange be sure to include depreciation recapture in your calculations. You will owe 25% on that amount. Also, increase your basis by selling/closing costs as well as improvements.

Other approaches? Look into reverse exchanges, whereby you identify and buy the replacement property first. This is more complicated I’m told so I recommend you get professional advice. You could also offset gains by tax loss harvesting, or consider reinvestment into opportunity zone properties. And of course you could just pay the tax.

[jfoxcpacfp]

Good response from Larry, but I would comment that you can do a partial 1031 exchange into a less valuable property. Not sure if that is the correct terminology but the difference you receive is referred to as “boot” and would be taxable. I think what Larry may have been implying by “per se” is that you cannot do a partial exchange and defer all of the gain but maybe he will clarify.

A 1031 exchange accommodator can help you identify properties and enable a 3-way exchange, if that is what you need, to accomplish your goals within the necessary time frame.

[Larry Ragman]

Good response from Larry, but I would comment that you can do a partial 1031 exchange into a less valuable property. Not sure if that is the correct terminology but the difference you receive is referred to as “boot” and would be taxable. I think what Larry may have been implying by “per se” is that you cannot do a partial exchange and defer all of the gain but maybe he will clarify.

A 1031 exchange accommodator can help you identify properties and enable a 3-way exchange, if that is what you need, to accomplish your goals within the necessary time frame.

That’s it. For some reason I was not focused on a less expensive property.

[peteypp44]

Thanks for the quick reply.

- A related question.

If I have all the properties in an LLC can I combine the depreciation of the 4 properties and discount it for the sale of the single entity ?

[Larry Ragman]

I’m going to say no categorically, but maybe better to say I have never seen that done and I don’t see how it could work.

[CREGuy]

On the original post, as I noted in another thread on 1031s, if you're thinking about selling your property and the market is indeed as hot as you say, just start looking for your replacement property FIRST, put it under contract, then sell your original property. If you're not comfortable doing that, then as soon as you go under contract on your property begin looking. The 45 days doesn't start until the day you close on the relinquished property. The 180 days, especially for a SFR, shouldn't even be a remote concern. Why on earth would you need more than 6 months to close on a house? The main takeaway here is that you don't wait to search for a replacement, and you definitely don't wait to identify them then write an offer. Write the offer first, tie the property up, and you can always terminate later if you're using a broker that's even remotely competent (which if you're looking for SFR, I realize is easier said than done).


Ultimately, what's the worst case scenario? You can't find a new property and you end up paying taxes on the sale? The alternatives are you don't try to do a 1031 at all and pay taxes, or you hold on to a property that by your measure, doesn't cash flow well.

[CREGuy]

On your question on using some of the funds for repair, it's pretty much been answered, but yes you can do a partial exchange, and will owe taxes on the portion you don't roll. Also as someone mentioned, you would be better off rolling the entire amount and then doing a cash out refi down the road and using that tax free money to pay for any repairs unless they're repairs that need to be made immediately.

[jfoxcpacfp]

Thanks for the quick reply.

- A related question.

If I have all the properties in an LLC can I combine the depreciation of the 4 properties and discount it for the sale of the single entity ?

Not in my opinion, but on what basis do you think it a discount would be appropriate? Discounts for tax purposes that I’m familiar with (which isn’t necessarily saying a lot) fall in 1 of 2 categories: minority interest or lack of control.

[White.Beard.Doc]

Doing a 1031 is a great way to trade up without paying taxes on the gains of the sold property. But with a 1031, you have to have as much equity in the replacement property over the initial period that you hold it or there are negative consequences from a tax perspective. There is no hard and fast rule on how long you have to wait post closing to cash out refi the replacement property, but many accountants recommend a year or at least waiting until the next tax year. If your goal is gaining cash to pay for a renovation, is there an alternative strategy available? Perhaps you have an opportunity for bonus depreciation on a replacement property that might allow you to shelter the gain on the sold property?

[peteypp44]

Thanks again for all the helpful information.

We are going to look for a property to 1031 into, I am feeling more confident after talking it through with a local attorney.

Alternatively:

I was wondering if anyone had experience with deferring losses in a LLC (where we own properties) and counting those losses against the gain of the sale of property in a given tax year. For example if we had 50k deferred losses and could I write that off against the sale of the property?

[StarTrekDoc]

Curious, Why would have deferred losses in the LLC.in the first place?

[jfoxcpacfp]

Curious, Why would have deferred losses in the LLC.in the first place?

I think petey is referring to the passive loss limitation that carries forward until the property is either sold or has a profit. If so, yes, you will be able to deduct those losses against the profit (or increase the loss) when/if you sell the property. This has nothing to do with a 1031, it’s the same for anyone with high income.

[The White Coat Investor]

Other options include an opportunity zone fund and a "721" aka UpREIT where you trade a property for shares of a REIT. One of our sponsors offers UpREITs and several of them have opportunity zone funds.

[peteypp44]

I think petey is referring to the passive loss limitation that carries forward until the property is either sold or has a profit. If so, yes, you will be able to deduct those losses against the profit (or increase the loss) when/if you sell the property. This has nothing to do with a 1031, it’s the same for anyone with high income.

- Yes that is correct.
-Thanks to all!

I have learned a lot and now can make an educated decision.