1031 or not!

Wilmington, MA · Member since 2015 · 6 posts · 1 vote

Hi,

I am planning on a potential 1031 (very early stages) and would like to see what the reinvestment goal would be to maximize the befits of the 1031.

property I would like to exchange

purchase price $515,000

sell price est: $725,000

current principle balance: $350,700

Interest rate 3.25

Current Mortage is $2300 and it rents for $4000. This was the first property I ever purchased so I have a lot of equity and I feel like it could be better used.

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

@Zachary Rosa.

To see how much a 1031 exchange will benefit you in a sale you must first calculate the performance of your current property. I really starts with the "why" of selling. Compare that to the performance of a new property (with that equity unlocked but also with a different interest rate as @Katie Ripp said). Why do you want to sell?

The 1031 exchange will indefinitely defer all tax on profit and all depreciation recapture. Here's the key components to calculate your tax liability

Adjusted cost basis - Is the purchase price, plus capital improvements, minus depreciation.

Net Sale - Is the contract price, minus the closing costs and commissions.

adjust cost basis - net sale = net gain

Your gain is made up of profit and depreciation recapture. And you can use that to calculate your tax hit.

In order to defer all tax you must purchase at least as much investment real estate as your net sale using all of your net proceeds.

Net proceeds - Is the amount of cash that goes into your exchange account.

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Jon Taylor
Pasadena, CA · Member since 2019 · 136 posts · 148 votes
1y
What is the tax basis?
When did you buy the property?
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Zachary Rosa
OP
Wilmington, MA · Member since 2015 · 6 posts · 1 vote
1y
2018
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Katie RippBusiness Member
Accountant · Scottsdale, AZ · Member since 2020 · 31 posts · 38 votes
1y
Hi Zachary,
You are right - that is a lot of equity! But man that interest rate is great.

From a tax perspective, I am assuming you would like recognize $0 of the gain on your property in this potential 1031 exchange. Assuming that's true, I would recommend looking for a replacement property (or properties - you can purchase multiple in the exchange) with value of at least $725K (selling price). To defer all of your gain, you'll want to trade up in value, replace all the debt (meaning new properties have at least $350,700 of debt), and not take any cash from the exchange (this is boot which = taxable gain).

As for replacement property, it just has to be real property - meaning it can be commercial, STR, land, etc!

Hope this helps!
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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
1y
You could also get a line of credit for about $150k (you should be able to borrow 75% of the value.)
The reason I suggest this is…
1) you save $40-$60k in selling costs.
2) you have a lower blended interest rate (2/3rds at 3.25% and 1/3rd at 7 or 8% instead of the whole $500k at 7 or 8%) saving you another $1k/mo in interest.
3) you only pay interest on that $150k when you actually use it, not from day 1
Unless you hate this property, or want to buy something you can’t afford without selling, that would be my plan. The new property has to make $50k plus $12k/yr more than the existing property just to break even. That’s best case.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
1y
@Zachary Rosa.

To see how much a 1031 exchange will benefit you in a sale you must first calculate the performance of your current property. I really starts with the "why" of selling. Compare that to the performance of a new property (with that equity unlocked but also with a different interest rate as @Katie Ripp said). Why do you want to sell?

The 1031 exchange will indefinitely defer all tax on profit and all depreciation recapture. Here's the key components to calculate your tax liability

Adjusted cost basis - Is the purchase price, plus capital improvements, minus depreciation.

Net Sale - Is the contract price, minus the closing costs and commissions.

adjust cost basis - net sale = net gain

Your gain is made up of profit and depreciation recapture. And you can use that to calculate your tax hit.

In order to defer all tax you must purchase at least as much investment real estate as your net sale using all of your net proceeds.

Net proceeds - Is the amount of cash that goes into your exchange account.
The 1031 Investor5137 Reviews
Website View Page
1 Reply
Jon Taylor
Pasadena, CA · Member since 2019 · 136 posts · 148 votes
1y
@Dave Foster is absolute right!

I have a calculator (semi-ugly but effective excel sheet) I use to look at the numbers on all 1031 exchanges I’m considering.
Let me know if you want help with the calculations

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John Gillick
Investor · San Diego, CA · Member since 2016 · 35 posts · 21 votes
1y
Quote from @Bill B.:

You could also get a line of credit for about $150k (you should be able to borrow 75% of the value.)
The reason I suggest this is…
1) you save $40-$60k in selling costs.
2) you have a lower blended interest rate (2/3rds at 3.25% and 1/3rd at 7 or 8% instead of the whole $500k at 7 or 8%) saving you another $1k/mo in interest.
3) you only pay interest on that $150k when you actually use it, not from day 1
Unless you hate this property, or want to buy something you can’t afford without selling, that would be my plan. The new property has to make $50k plus $12k/yr more than the existing property just to break even. That’s best case.
I'm in the same situation as OP. Down to the exact 3.25% interest rate. Sell price is 2M and balance is 580k. I've been trying for years to find somebody that would give me a line of credit on an investment property but have had no luck. (Maybe because it's in NY?). Where do you find these investment property helocs?
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