Questions regarding 1031 Exchanges

[Patrick Orah]

Hello BP community,

I am in the process of selling one of my properties (single family rental), but I am having a hard time finding another property to invest in, hence my need for advice with the 1031 exchange. 

My first question is basic - does the custodian facilitating the 1031 exchange need to be in the same state of the sale/purchase of the property?

Can anyone advice on the 1031 exchange process, specifically with how it works and what to expect?

Also, is there a good or bad scenario where the 1031 exchange should or should not be used? The reason for this question is, when I discussed the sale of my property with my tax person, I was informed that the base value of my property (from a tax perspective) is $245K (original purchase of $285K 17 years ago). Therefore, the sale price minus the base value, minus the sales expenses, minus other deductions determined that I would owe around $15K in federal taxes for the sale of my property. So, I wonder, is $15K worth going through the 1031 exchange process especially since I have not identified a new property. Especially sin the new potential property would be at a higher cost basis at the top of the market. 

Additional questions:
What happens if I cannot execute on either identifying and/or closing on a new property within the time required by the 1031 exchange? Will my money be returned to me and then I will be subject to the tax?

Is it required to have the 1031 exchange set up a certain amount of time before the sale of the property?

Can the 1031 exchange be used to purchase multiple smaller properties that equal to a greater value of the property that I am selling?

Can the 1031 exchange be used to buy into a real estate investment group to buy multifamily properties?

Thanks in advance for your responses. 

Patrick

[Dave Foster]

@Patrick Orah, Since the IRS requires the use of a 3rd party the qualified intermediary, to facilitate your exchange.  They'll be your guide through all of the maze. And they have to be involved prior to the closing of your sale.  So finding one your comfortable with right now is job 1.

That being said,  Here's some shotgun answers

-An exchange can run you less than $1000 from a good company.  There are several here on BP.  So is saving $15000 worth spending $1000???  For some yes, For some no.  Do you plan on continuing to invest in real estate?  If so then it's hard to imagine a scenario where you wouldn't want to keep the $15K in your pocket.  And no you don't always have to pay the tax sometime.  You can defer your entire life and have your property go to your heirs tax free.

-There's no penalty for starting and not completing a 1031 exchange.  The best time to let one die is at day 45.  If you can't find a property you like then don't turn in a 45 day list.  You'll get your proceeds back on day 46.  And pay the tax you would have when you would normally.

-Any time before the sale.  There's a bunch of us who have probably set up exchanges for clients even on the same day as closing.  

-Yes a diversification exchange is selling one and purchasing several.  Great strategy.  Keep the valuations in mind

- If you're talking about a syndication for MF, probably not.  A 1031 has to be a sale of actual real estate and a purchase of actual real estate.  Most syndications require that you purchase a membership interest in an entity that owns real estate.  This doesn't count for 1031.

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