1031 Exchange - How to set it up?

[Sunny Malik]

Hi everyone, 

I have two properties that are under contract and will be closing in the next 20 - 30 days. 

We thought we may keep one as a rental but received great offers on both that we wanted to move forward with. 

We fully anticipate using the funds for further real-estate activity (flipping or long term hold). 

What's the best way to set up a 1030 Exchange? Anyone used someone in the past they would recommend? 

[Alex Evans]

I would recommend Scott Saunders at API Exchange 

[Dave Foster]

@Sunny Malik, for a 1031 exchange you have to use the services of a Qualified Intermediary.  They must be an unrelated 3rd party to And their job is to document the exchange on both ends and hold the proceeds in between.  And probably even more they need to be your guide through the maze of the process. 

Most important thing - they have to be involved prior to the closing of your sale.  

I'll reach out via pm and get some more information in your hands.  Your time is getting close :)

[Bill B.]

Don’t forget. Neither the current properties nor the replacement properties can be flips. 1031’s are for investment properties. Flipping is considered a job. 

Otherwise, you’ve received great advice. Get the QI involved before closing, as you can’t receive the money or even control over the money. You then have 45 days to report which properties you’re going to buy. If you choose 3 or less you’ll keep it simple. You have to spend your net sales price. (Sales price minus selling costs, not just cash you receive or “profit” you make.). Then you have another 135 days to close. Good luck. 

[Sunny Malik]

@Dave Foster - looking forward to chatting more! @Bill B.

@Bill B. - appreciate the insight there. Let me provide a little more detail on our scenario. 

We bought a property for largely the land. Pretty much bulldozed the previous property and built two duplexes side by side we planned to use for rental / long term hold. However, given the market and that area, we realized it would be better to sell the two duplexes and instead go and buy a multifamily (10+ units). 

Could I still proceed forward in that situation with a 1031 Exchange or would the first property be considered a flip? At what point does a flip become an investment property in the eyes of a state / tax (how long do I have to hold for it be recognized as an investment property)? 

[Bill B.]

It’s been asked and answered (mostly by people like @Dave Foster) but it all comes down to intent. If you can look the IRS in the face and say you planned to rent it out and show the advertising for rent, the market analysis, etc etc you’re in good shape. If you listed it for sale before it was built or even as soon as it was built, that’s not so good. If someone came to you without you listing it for sale that’s slightly better. 

The “safe harbor” is 2 tax years or 2 calendar years, or two tax returns (as little as 1 year and 1 day.) depending on who you ask.

And if this happens once in your lifetime you pry get the benefit of the doubt. It if it happens 3 times in 2 years, probably not so much. 

Get a pro involved and hopefully they would turn you away if they didn’t think it would qualify. 

[Gino Barbaro]

@Sunny Malik

I would contact Dave Foster who commented on this thread. He has helped many of our Jake & Gino students with 1031s and has been doing it longer than he wants to admit!

Gino

[Sunny Malik]

Great feedback everyone and thank you for contributing. 

I get in touch with Dave Foster and feel I'm in good hands moving forward. 

[Nick Sansivero]

@Bill Brandt

Hey Bill! When you say you have to spend at least your net sales price, does this basically mean that the purchase price of the replacement property needs to be greater than or equal to the net sales price of the sold property?

In other words, I could use my “profits” from the sale as the down payment as long as the purchase price is higher than the net sales price of the previous property? Thanks!

[Bill B.]

I thought you were following and then I feared you lost it when you mentioned “profits”. 

If you sell a property for $500k and after closing costs you “net” $450k, you have to spend $450k. It doesn’t matter if you paid $100k or $440k. It doesn’t matter if you owned it outright or owed $450k and got no cash. Your replacement has to cost at least $450k. 

You also have to use any and all “cash” you received from the sale in the new purchase. If you owned the property in the example out right you have to use all $450k for the new purchase. If you owed $440k you have to use the “entire” $10k in the new purchase. 

Ps. You don’t “have to” do any of these things but any cash kept or any less spent on the replacement is considered 100% taxable, not a prorated portion. So if you’re trying to shield $100k from taxes and you spend $100k less or keep $100k of the cash then there was no reason to do the exchange. You pay the same taxes. 

[Ryan Beatty]

Find a good QI, start looking for replacement properties now (hopefully you've already started this). I'm sure there's lots of folks here that would be happy to help out

[Jane Ho]

My client (I am an agent) used them when I was helping buying in Sacramento and he is selling his Las Vegas property, pretty smooth. All good. 

Quote from @Alex Evans:

I would recommend Scott Saunders at API Exchange