Considering doing a Reverse 1031

[Kimberly T.]

Just looking for some feedback on what we are considering doing here to see if there's something I'm missing.

We currently own our house and a triplex in CA, along with some fourplexes in AZ and CO.  We plan to leave CA in the next 5 or 6 years and probably move to CO, so we're trying to determine the best strategy to offload our properties here.  I did a little research on reverse 1031s, and this is what I'm thinking:

1) Buy some rentals in CO as our reverse 1031 replacement properties; maybe a fourplex plus a house we could live in later on, and have our PM manage them for us as rentals.  We have enough cash that we could put 25% or so down on each without needing to tap into equity of any of our current properties.  These replacement properties would go in the required EAT.

2) Name our CA triplex as our relinquished property, list it, and sell it within the required time frame.

3) Use the proceeds from the triplex to finish off the reverse 1031, and I guess that will reimburse us for the cash we used up front to buy the replacement properties.

4) After a couple years, we'd sell our current home in CA and avoid capital gains tax on that profit, then quit using the house we bought in CO as a rental and move into it.

So, my questions:

A) Does that all sound feasible?  Is there something I'm not considering that could pose a problem (besides the obvious, like not being able to sell our triplex within the 180 days or something)?

B) It looks like there are companies who specialize in handling reverse 1031; which state would be better to find someone in for handling this, CA or CO?  How do you evaluate these companies?

C) Any problems/issues with having the rentals managed while in the EAT?  And then getting it out of the EAT and into our names?

D) We manage our triplex ourselves, so that's why I was thinking it would make sense to put the replacement properties in the EAT instead of the triplex, so we don't have to deal with the whole LLC issue with that; is there something I'm missing here?

E) What kind of problems do lenders typically have with dealing with a reverse 1031?

F) What starts the clock on a reverse 1031 in this scenario?  Is it the purchase of the first replacement property?

Woo, that turned into a long post!  Any feedback appreciated!

[Dave Foster]

@Kimberly T.

Your long post just brought tears of happiness to my eyes!  You have hit on the trifecta of strategies to squeeze the most out of your portfolio.  Combining a reverse exchange with repositioning a portfolio geographically and taking advantage of combining sec 1031 with your primary residence exclusion - There's some awesomely savvy moves you're contemplating.  Here's some rough answers to your questions.

A. Absolutely feasible under today's law. You're moving your portfolio tax deferred. You will take advantage of the primary residence exemption twice and the second time will have the effect of turning of the tax deferred dollars into tax free dollars. You are contemplating a reverse so you will actually get to double dip the NOI on all properties during the 180 days.

I would say the biggest hurdles are going to be what your perceiving - the need to sell in 180 days.  The other potential hurdle is going to be obtaining the financing for the reverse properties.  EAT financing is a one off type of financing that is usually only done by portfolio lenders, private banks and individuals.  It's not impossible at all but something to think about.

B. Any good QI with a national presence that specializes in reverse exchanges should be able to handle your transaction.  You'll find your best pricing coming from those who do the most as economies of scale can be significant. 

C. I can't speak for every QI but the way we handle management is that while the EAT is the owner of record, you actually have a NNN lease on the property that allows for sub leasing so you control all expenses and manage all aspects of the property. You can act unilaterally in any way you want to manage improve and utilize the property.

D. One other potential bonus on the LLC side of things is that, depending on how your reverse is structured each property could be in it's own LLC. Since a single asset single entity LLC is perceived to the be same as the property itself then at the end when you sell your triplex you can have the option of either taking title in the same name as on the triplex or you could take over the LLCs and the properties that they own - so free LLCs at the end of the process if you choose.

E.  Lenders I sort of answered this in A but you're asking a bank to lend money secured by you to purchase a property that you won't own.  It has to be non-recourse financing to the EAT.  This is what makes it a portfolio product.  Plenty of lenders out there who do them.  Sometime it just needs to be explained.  But depending on your situation you may find it less expensive to simply refinance the triplex and your primary and use those proceeds as cash to purchase the reverse properties.

F. The clock starts with the purchase of the first new property.  You have 180 days to sell your old property and purchase the new one from the EAT.