Advice on how to 1031 from one to many?

Question

I exchanged 3 SFR rentals into part ownership in a luxury apartment. I've decided to exchange out of that back into SFR rentals again. (Long story, but just so you have the necessary data... my general plan is to acquire numerous, small 1/1 or 2/1 homes to rent out to retirees. Not all in one location. Will diversify into different regions of country.) Currently have 300k in equity and 400k in debt that I will need to exchange out with (700k must be my minimum purchase when I exchange to avoid any tax event).

I want to acquire somewhere around 8-10 properties. Will add more money if need to. Exchanging from 1 to 10 seems very daunting (and expensive transaction wise re: an Exchangor's or Accomdator's fees).

Any advice or tips anyone?

Thanx in advance.

I want to acquire somewhere around 8-10 properties. Will add more money if need to. Exchanging from 1 to 10 seems very daunting (and expensive transaction wise re: an Exchangor's or Accomdator's fees).

Any advice or tips anyone?

Thanx in advance.

Dave Toelkes · Answer

You are making this too hard.

Lease option the package of properties for two years. While you are paying rent, you do whatever rehab you want done. Put your relinquished property on the market, and then whenever it sells (even if it takes a year to sell), exercise your option to purchase the lease option properties. If you complete the entire exchange within 45 days of the relinquished property settlement, you don't even have to make written identification of the replacement property.

Dave Toelkes · Answer

Robert,

Yes, this can be done and does not have to be structured as a reverse exchange.  You can still do what you want as a forward exchange.

Open a 1031 exchange and "sell" your relinquished property.for $60K.  Identity the $40K replacement property and put it under contract.  Assign your contract to the QI.  The QI then buys the replacement property and the QI uses the $20K balance of your exchange funds to do the rehab.  Once the rehab is complete, the QI reconveys the property to you (the exchangor) and closes the exchange.  As long as everything can be done within the 180 days exchange window, the exchange remains intact.

Now, if the relinquished property had an underlying mortgage, you would have to contribute cash equal to the mortgage payoff to the exchange escrow in order to complete the replacement property purchase and rehab.

Robert Mayo · Answer

Dave T, thanks.  Very practical suggestions.

Dave Toelkes · Answer

Any QI worth his fee is going to open that envelope and acknowledge receipt in writing.

Brian Levredge · Answer

Depending on the relationship you have with your accomodater, there is a way around the 45 day rule to target your replacement properties.  Since you really have 180 days to close on the replacements, what you do is send an empty envelope to the accomodator within 45 days of close on your sale.  The post mark is enough legal proof that you complied with the requirement.  Then you acquire the properties on a case by case basis and give the accomodator an updated sheet of paper with the subject addresses on it.

David Breitzmann · Answer

I love an innovator.  What I get from this is:

there are a lot of stars that have to align perfectly for no one to end up with not just egg, but an entire chicken straddling their faces.

the addendum that "...upon 7 days notice he must sell them all to me" may actually come back to roost (a poultry theme).  What if prices depress?  If X is savvy, he's going to ensure that it reads "...upon 7 days, after the second year, he[Robert] must purchase them all from me."  A guaranteed buyer in what may be a sinkhole?  I think my new business plan was just formulated.

(kidding)

Robert Mayo · Answer

It's already been mentioned, but one big question I have is:  Is it possible to exchange into a fixer with a rehab budget.

For example, is there a way to exchange a $60,000 property for a $40,000 property plus a $20,000 rehab fund?   Obviously the IRS wants to be sure the $20k gets spent on rehab, not to cash out (boot).

I've seen one tricky way, but it seems to have problems:  a reverse exchange.  Your exchanger buys the fixer and then rehabs it, and then you trade the relinquished property for the newly rehabbed property.  I'm not sure how the value on the replacement property is set -- hopefully it is just the sum of your costs (purchase + rehab).  All this must happen within a 180 day period so you can't tolerate rehab delays.  I'm not sure how the exchanger gets the money to do the job.  Perhaps you supply cash or they use their own and charge interest?

Robert Mayo · Answer

One more idea, related to both finding 10 properties to close at once and related to rehabs.

Am I allowed to work out a business arrangement with another RE investor, in which he constructs the asset I wish to exchange into?

For example, I might want 10 properties purchased at low cost and then rehabbed according to my specifications.  I work out an agreement with investor X where he agrees to do this and then hold the properties for up to 2 years.  The agreement would also state that upon 7 days notice he must sell them all to me.

Such a method would allow me to "stage" my exchange so everything is ready to go at the same time, but also give plenty of time to shop for properties.

Then again, this arrangement may not be allowed by the IRS.  Investor X might be considered a "related party".  Anybody know?

Dave Toelkes · Answer

Since you are looking for multiple properties for the replacement property in your exchange, consider looking for sellers with multiple properties that could be sold as a package in a single settlement.

Alfred Bell · Answer

Robert M:
My concern is how to line up so many property purchases and have them all close right around the same time. It was tough doing the original 3 to 1. Going from 1 to 10+ sounds hairy.

Also, I can't get financing on these (I'm self-employed and don't have the income to back the purchases up.) So, I'll need to spread the 400k of debt around and sellers will need to carry some paper. I guess if I waited until the market hit bottom and was in a total buyer's mkt with desperate sellers I might be able to pull this off.

I don't know... maybe I should just exchange into a multi-plex (that I own in full) and buy the SFRs that I want with other cash.

Advice on how to 1031 from one to many?

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