Newbie 1031 question

[Kenny Mercado]

Hi. I’m in the middle of my first real estate investment which is a new construction build of a one family home. From what I understand, I can sell the property and reinvest the proceeds into a new property without paying capital gains tax on the sale. To qualify, the new property must be of a similar nature, character, or class as the one being sold.  That being said. Does the new property have to be a new construction on a one family or can it also be a new construction on a multi family? Thanks in advanced!!

[David M.]

@Kenny Mercado

You need to first establish that its an investment property (you can only 1031 an investment property).  Its a matter of "facts and circumstances" so its not exactly strictly clear if 1yr +1day is enough or two years.  But, you need to rent it.  

With the recent tax law changes, you can only 1031 real property so from that point of view as long as you stay within the asset class you will be fine.  Doesn't have to be new build.  You just need to use/transfer at least as much as the sale price and the loan amount (or was it principal).  So, a 1031 is always "sideways" or "up."  @Dave Foster please chime in on the two dollar amount conditions, and of course any other thoughts you may have.

if you don't transfer enough to satisfy the requirements, the "excess" is considered what as call the "boot" and you just pay taxes on that amount.

Just remember, before you start that this track that once you start you kinda need to keep going until you "drop" --- i.e. die.  Or, you need to have enough cash to cover the built up tax liability.  This is one of those cautionary tales where people are all gung"-ho" to start real estate investing, but want to get out, either immediately or after a while.  There are some ways to get more passive, but difficult to get completely out if you can't afford the tax liability.

Good luck.