1031 Strategy - What to do with a Boot?

[Daniel Sherman]

Hello Fellow BP members,

We are closing on our first investment property on Feb 28th, 2023 and would like any advice from others who've successfully executed a 1031.  Our numbers:

Purchased duplex in 8/2020 for $120K with rents at $750 per unit.
Selling on 2/2023 for $325K with rents at $1500 per unit.
Net proceeds ~$303,305.00

We are looking for one, maybe two properties in the Tampa area (one hour drive) that add up to the $303K.  We dont have a ton of liquid cash to go above the $303K right now, unless we do a quick HELOC (if anyone has a good HELOC hook-up, I'm all ears).  We don't want to go below the $303K if at all possible.  For those who've done a 1031, did you fall below the total amount and if so, did you pay the tax on the boot of find some creative way to eliminate the difference?  I've seen properties in the area that are pretty desirable for $290K, but that would leave us under the full amount.  I don't mind paying tax if that's the smartest choice, but since this is our first 1031, I figured I lean on the experience of others before learning everything the hard way.

Dan

[Whitney Nash]

Hello @Daniel Sherman

For full tax deferral you would want to find replacement property (RP) that is of equal or grater value than what you sold (fair market value, i.e. sales price) not =/> than the proceeds from the sale. So, in your case the RP needs to be $325 or more. As you stated, this can be accomplished by purchasing more than one RP to reach the cumulative value of $325k, if needed. Taking a small loan to be able to purchase a property at that price or higher will help you have a fully tax deferred exchange. From the numbers, it appears that you don't have a loan on the property that you are selling, is that right? If you do, debt offset will figure into your tax deferral numbers too. 

Buying RP that is a little less than what you sold your property for happens all the time and people plan for paying tax on the small difference. If the RP is close to the $325k price, then negotiating improvements to increase it, as stated previously, could be a good option.  

Also, since it wasn't mentioned if you are already working with a QI and have an exchange agreement in place or not, I just wanted to make sure that you are aware that you do need to have that done before you close tomorrow or it will be too late to do an exchange at all.