1031 Exchange next year--help!

[Fletcher Caulk]

My wife and I own a townhome in Culver City, CA that is appreciating very well but not cashflowing. My renters' lease is up next summer and I'd like to do a 1031 exchange into a multi-family property. Right now, our loan balance is $435k and the townhome next to us just sold for $640k. So I'd need to find a property worth more than ours appraises for and carry a mortgage of greater than our remaining loan balance. 

Does anyone have any advice for markets to look at and professional help to seek? Are there any steps I should be taking now, or when should I start? 

[Clayton Mobley]

Another point to be aware of is that you don't have to do a 1:1 exchange. Since your property is pretty valuable, you could exchange for multiple smaller properties. Real estate in the South and Midwest is much cheaper than in CA, so you could roll $650k into a tidy portfolio of financed turnkey properties. I'm an SFR guy so I can't say what you could get in the MFR realm, but I'm sure someone will pipe in with info.

If you want to diversify and buy multiple props, you have to be aware of some rules regarding property selection. You have to identify your replacement properties within 45 days of closing on the sale of your current prop, and you have to purchase a replacement prop (or props) within 180 days. 

You can identify up to 3 replacement properties under normal 1031 rules, but if you want to roll your value into multiple props, its usually a good idea to identify more than 3 in case one or two fall through. In that case you need to abide by these rules:

• The 200% Rule: You can identify as many replacement props as you want, as long as the total value does not exceed more than 200% of the value of your current prop. So, if you sell your prop for $650k you could identify as many as you want as long as they all add up to $1.3m or less. OR
• The 95% Rule: You can identify as many replacement props as you want, without any value limit, as long as you purchase properties with a total value equal to 95% of the total value of all the props identified. So, you could identify 10 props with a value of $5mil, but then you'd have to purchase $4.75mil worth. 

Based on your situation, you'll probably fall under the standard Rule of Three or the 200% Rule.

In any case, you MUST work with a Qualified Intermediary in order to execute a 1031. If you don't have one on your team, the exchange is void. You can't take any amount of profit from the sale at any point, every cent has to go through the QI, or the exchange is void and the sale is taxable.

There are two great QIs who are very active here on BP, @Bill Exeter and @Dave Foster - both extremely knowledgable with a TON of experience.

There are plenty of rules and regs with a 1031, but a good QI will make sure all your T's are crossed, so make finding a pro your top priority.

Best of luck!