What to do with $100,000

Question

I recently asked about a 1031 for a vacation rental and while that may still be an option it's not looking like the best one for me. My single family rental is under contract and should close late next month with proceeds right at 100k. I'm having trouble finding a suitable rental property to purchase in the 400k range. Ideally I want a 4-plex but most in my area are 500+ and I don't want to spend any of my savings to increase the down payment. My lender says there are no loans available with less than 25% down for a 4-plex.

I'm also a licensed contractor and considered building a single family home for sale. Is it possible to use the 1031 to purchase a residential lot to build on? Is there a minimum purchase price for the replacement property? If I went this route I'd like to find a lot for 100k and buy it free and clear then use a construction loan to build the house.

Any other options I should consider? I don't want to end up just trading single family rentals and sure don't want to pay cap gains.

Blynn Keller · Answer

@Dave Foster thanks, that makes sense. I'll continue on my search for a multi unit then.

Dave Foster · Answer

In order to fully defer tax you need to purchase at least as much as your net sale (260 less the costs of the sale but before mortgage payoff).  It can be one or more properties.  You can purchase less than that but will pay tax on the difference.  For instance if you sell for 260 with 100k profit and buy for 210 you would shelter the tax on 50k and pay tax on the other 50k

Blynn Keller · Answer

@Dave Foster Let me see if I understand this. The sale price of my property is $260,000 of which I will net $100,000 profit. I therefore need to purchase a property valued at least $260,000?

Jason Dillard · Answer

Thanks for correcting me.

Dave Foster · Answer

@Blynn Keller, there is an option using the 1031 to sell your vacation rental and use the proceeds to buy a lot and the construction on it.  Called a construction exchange or in another variation - a reverse exchange, it involves your intermediary forming a holding entity to take title to the lot and transferring title to you when the construction is complete.  The issues you will run up against in your particular situation are first that you will have the earlier of either 180 days from when your intermediary takes title to the vacant lot, or 180 days from the sale of your current rental to complete the construction and the process.  Second, the reverse or construction exchange can be quite a bit more expensive than a regular exchange.  I'm happy to flesh these out in more detail with you.

Regarding the comment by @Jason Dillard, that is only partially correct. If you retire debt before selling that is true that you don't have to replace it.  However you are still bound by the requirement to purchase at least as much as you sell.  So if you are selling for 400K with 300 in debt you need to purchase at least 400K and use the 100K to do so.  If you pay down debt to 200K you still need to purchase at least 400K in real estate and use all 200K to do so.  Buying less than your net sale will result in a taxable event.

Matt M. · Answer

@Blynn Keller Do you have a 1031 intermediary that you are working with? If not, then I have a great one who is also a CPA. Message me for his info.

If you build on a lot, don't forget about tap fees up here. Some are $30k plus. Unfortunately the "plexes" are hard to come by and over priced. You might have to look into fringe areas. I'd get to looking now as you are under the gun if you are going to do a 1031.

Jason Dillard · Answer

If you retire some of the debt prior to the closing, then you won't have to carry as much debt forward.  Of course you need cash or a way to get cash.  This allow you to go down in values if that make for sense for your financing.  You may find the killer deal on the 300k propery that's worth 400k.