1031 Exchange in Virginia

[Elizabeth R Matthews]

I am selling a property in Virginia and want to know if I should set up a 1031 exchange. I bought it for 600k in 2002, and lived in it as my primary residence. In 2005 I moved to Louisiana and rented it out, thinking I would sell it within a couple years once I was sure I would stay in Louisiana. But then 2008 happened and I couldn't sell it - it didn't sell. So I have kept renting it out since then, taking a loss every year (rent did not cover expenses of taxes, insurance, maintenance, mortgage payments) so never any cash flow from it. Now I am selling it for a 925k sales price, I will have to pay off around 300k of mortgage and then there is the realtor fee (3%), a seller contribution of  20k. All said, I am not coming out much ahead for a property I have owned for 20+ years and had the hassle and expense of maintaining. That said, should I do the 1031 exchange and look for a property that would get me a better return? Would I have to buy something at 925k less realtor fee, in order to get the tax shelter? I don't want to take out another mortgage so I would prefer to get something at the price point of whatever the cash proceeds end up being. Are there properties out there that are a good investment to be had right now? My closing date is May 31, is it possible to get a 1031 set up at such a last minute point in time and is it even worth it? Maybe its better to pay the tax and put the remaining cash in a high interest yielding account. And how long would I have to find the new investment property if I did the 1031 exchange. What if I can't find something I want? Any advice or thoughts will be appreciated. I am nearing retirement age so I don't want to tie it up for another 20 years unless I am getting some cash flow right out of the gate.

[Maureen McCann]

Hi Elizabeth...Sean gave you some excellent advice and guidance. You still have time to set up a 1031x for your VA property. I like Sean's suggestion of just setting it up in case you utilize it and find replacement property(s) within the allotted timeframe.

This is where I may be of value to you.  You mentioned you do not want to take on any new mortgages and you are close to retirement. This tells me that the more monthly cash flow we could generate for you now the better, correct?

If this sounds good to you and you want to learn more then feel free to DM me. 

Cheers,

Maureen

[Elizabeth R Matthews]

Quote from @Sean Ross:

@Elizabeth R Matthews,

I'm sorry to hear that this property has been a bit of a disappointment for you.  Since you're on a very tight timeline, let me give you some quick answers:

Is it possible to get a 1031 set up in time?
100% yes, it is.  Almost any competent QI can help start a 1031 exchange within that timeframe.  Our company routinely sets up 1031 exchanges on 24 hours' notice or less (it's not ideal, but it happens!).

How long to find a new property?
You'd have 45 calendar days from May 31. That puts you right around July 15 as the final deadline to identify potential new properties to buy.  Important to note that you don't have to go under contract or even make an offer in that time; you just need to formally list a few properties that you would consider buying in your 1031. 

What if you can't find something?
There are two answers here:  If you don't find anything by July 15, then you can end your exchange on July 16 and it'll be as if you never tried the exchange.  However, if you do identify something (or multiple properties) by July 15 and then decide later you don't want to complete the exchange, you'll have to wait until near the end of November to get your funds back.  

Is it possible to find a good investment?
It sounds like you're mostly interested in cash flow.  There are options for you there, but obviously nothing is guaranteed. You don't have to trade out of a single family rental into another single family rental -- there are other 1031-eligible investments that might fit by providing passive monthly income.  That's not really my place to say which you pick, but I could make some introductions for you to help you learn more about your options. 

Would you have to buy $925K or greater, less closing fees?
To get full tax deferral, yes.  You would need to find a property (or properties) with a value equal to or greater than your current property, less closing fees. If you find a less valuable property, you can still defer some of your gain but you would end up recognizing some tax. 

My guess is that your adjusted tax basis is fairly low, and that you're looking at a whale of a tax hit if you don't do a 1031 exchange. 

If you start a 1031 exchange now, think of it as a purchase option that gives you the right to defer your taxes if you find the right property by July 15.  If you don't, then cancel your exchange and pay the tax, but at least you'll know that you did your due diligence. 

Our firm offers free consultations -- I'd be happy to walk you through this and answer any questions you have. 

 Thank you so much for responding. I have messaged you!

[Elizabeth R Matthews]

Quote from @Maureen McCann:

Hi Elizabeth...Sean gave you some excellent advice and guidance. You still have time to set up a 1031x for your VA property. I like Sean's suggestion of just setting it up in case you utilize it and find replacement property(s) within the allotted timeframe.

This is where I may be of value to you.  You mentioned you do not want to take on any new mortgages and you are close to retirement. This tells me that the more monthly cash flow we could generate for you now the better, correct?

If this sounds good to you and you want to learn more then feel free to DM me. 

Cheers,

Maureen

 Thank you so much for responding. do you have opportunities that would be cash flow right out of the gate in San Diego? If so I may be interested, I have family in that area. 

[Aaron Howell]

@Elizabeth R Matthews I've completed a 1031 exchange twice.  The Qualified Intermediary will take a lot of the guess work out of the process and hold you hand the entire way.  The advice above is spot on.  You may not end up completing the exchange but at least having it set up giving you the option is helpful.

[Dave Foster]

@Elizabeth R Matthews, in addition to the gain on the sale from $600 - $925 you've also got depreciation recapture to deal with.  Youve got a serious gain and tax to deal with.  A 1031 exchange should be given serious consideration.

In order to defer all tax you must purchase at least as much as your net sale ($925K ish).  And you must use all of your net proceeds ($600K ish).   you don't have to purchase as much as your sale.  But you pay tax on the difference.  My guess is that if you only took the cash from your sale and bought a property for cash you'd still have substantial tax savings.

[Elizabeth R Matthews]

Thank you for this helpful response. I have some homework to do!