1031 exchange to rental unit 19 posts by 9 users

Posted: 07/17/2007 at 03:44PM

I am soon looking to sell some investment land and thru a 1031 exhange move this money into a sf or multi tenant house. Given the time restrictions on the exchange I don't feel I can spread this money across multiple units in a timely manner and the fact I cannot devote 100% of my time to this effort. My overall goal is to hold the selected property long term for retirement so basically mortage paydown w/ appreciation.

So, the question I have is am I ristricting myself in the future for access to this money/equity in the house when I want to look for the second rental house or a third? The alternative I see is paying the capital gains on the land sale and then taking my time to select mulitple properties but I do not want to give uncle sam the taxes.

Thanks
JimW

Posted: 07/17/2007 at 04:50PM

I've done a few 1031s and I never felt any time pressure. Of course I didn't wait until I had a contract to start looking. I had a very good feel for the local market, and picked a market with sufficient stock of resales that I felt I had a great chance of getting what I wanted. On the first one I did I went from 1 (in CA) to 3 (in TX).

The day I got the finalized contract for the sale (and had great confidence of it going through-there was a separate payment to me that would be forfeited if they failed to close-but credited to purchase price) I revisited 8 properties in 2 days and started writing offers.

I didn't see the " locked up" equity as a problem. Since I received and paid cash I (would have) just put the normal amount of payment into savings to build it up for the next purchase.

To answer peter's question: No, you don't get " taxed" on money you pull out. But the thing is you're borrowing your own money, but you're paying the interest to someone else. In my mind that's a losing game!

all cash

Posted: 07/19/2007 at 10:12AM

What amount of gains are we looking at, here? Is it really so significant that the exchange cost and risk would be more beneficial than just playing it safe eating the tax?

Posted: 07/19/2007 at 11:36AM

No Risk?

In Las Vegas there was a company called Southwest Exchange that was a facilitator of 1031 exchanges. It seems that the owner was using the money to support his lavish lifestyle instead of holding it in escrow like he was supposed to. Many people are out a lot of money, I believe the missing money (I could be off on this number) amounts to something like $90 million. Not only have people been bilked out of their money, the 1031 exchange time period has expired for most people and they will have to pay capital gains taxes on the property they sold even though the money has been stolen.

8)

Posted: 07/19/2007 at 01:13PM

This is my point:
If you are planning to sell an investment property and purchase another investment property. Why wouldn't you setup a 1031 exchange? At worst case you'd just be out the 1031 exchange service fees. At best you'd defer paying taxes and could grow your investment money more quickly.

Posted: 07/19/2007 at 02:10PM

Yes, as long as:
1) The tax savings is greater than the service fees
2) The risk with regard to timelines is acceptable

Posted: 09/19/2007 at 08:26AM

Jim,

Two things. If the above was taxed at the capital gains tax rate you only pay 15% of the $180K as taxes. If you have depreciation you will have recapture to pay and that is a bit higher.

If the choice is between a so-so deal and a good deal if you took more time then the tax bill might not be as high as it seems. An average deal that was rushed vs. a good deal that was not rushed.

As All-Cash says you can set up the future purchase before you have sold the property you are buying. By set up I mean identify the likely properties so that you are ready to put in your offer when you have a deal on the line.

It might be able to use an option to tie up a future deal. The experts in 1031 deals can comment. William and others how handle 1031 deals all the time or consult a tax attorney.

John Corey

Posted: 09/19/2007 at 10:03AM

We normally charge a flat fee of $1000 but we have implemented some competitor matching to reach out and prove just how good we are.

Also our company is different in that we are an independant intermediary. All we do all day is 1031 exchanges. I am not concerned with getting you to buy into 5 other companies products that are affiliated. We simply will do your exchange and do it right.

Losing your money is a real risk as we have seen a few times in the last year or so. There we companies out there that felt that reinvesting exchange funds into their other interests or companies that they owned was ok, when they really violated many peoples trust. Protect yourself by making sure you go with a company that has individual qualified escrow accounts that require YOUR signature to release funds, check references, look for longevity, Find out who the owners are, Is the company a member of the FEA, BBB, Do they have certified Exchange Specialists on staff, Do you get a real person when you call?, Are they bonded & carry E&O insurance in the name of the actual exchange company? Can you access your account information from the bank at any time?
These are all important things to look for. Not a lot of companies out there would steal your money just make sure to ask questions and make sure you are comfortable with the one you have chosen.

Good luck to you.

Posted: 09/20/2007 at 10:07AM

Thanks very much for those details, Mel and William. Sounds like the cost is on the order of $1000 plus the interest on the money for the time to make the exchange. I assume a pretty nominal rate on the money while waiting to re-invest. That would give about $179K ($180 net proceeds less the $1000 costs) to reinvest vs. $146K ($180K less $36K taxes plus $2K in interest) if you paid the taxes. Pretty significant difference.

Jon

Posted: 09/25/2007 at 07:23AM

You are welcome. Just wanted to comment on the interest topic as well. I didn't feel it was as important to talk about the first time around because I was focused on security issues. We match any competitors rates and that includes interest. On a regular basis we will pay 3% or more depending on the amount of funds that are being held.