Anxious about doing a 1031 Exchange

[Heidi Hughes]

Hi BP,

Feeling anxious about doing a 1031 on a property in CA.  We want to get out of the Berkeley rental market and are looking to diversify and get more cash flow.  Our long term tenant is looking to move, finally.  Feel like we need to seize the opportunity and sell.  Property may sell for around 1.1 mil.  We owe about 400K.  Would like to purchase at least 2 properties.  Maybe a multi family, but that seems hard to find in such a short amount of time.  Want to be in a market outside of CA.  We currently own 7 doors in Tulsa, Oklahoma.  It's my understanding we have to spend what we sell the property for minus fees.  That means we will need to finance the $400k. We are worried we won't qualify for new financing.  Self employment income is low last couple of years and we have several mortgages on other rentals.  We do have a good amount of dollars in retirement funds.  So what happens if we can't get financing?      

Was wondering if we should try to partner on one or both of the new properties? But I thought we have to hold new properties in the same type of entity so can't do a LLC. Is there another way to do a partnership?

Looking for thoughts and suggestions.

Heidi

[Dave Foster]

@Heidi Hughes, lots of questions in there.  Here's some guidance.

1. You do have to purchase at least as much as your net sale in order to defer all tax.  So if you want complete tax deferral you'll need to replace the debt.  But you can buy less than what you sell and pay tax on the difference.  so depending on your gain it might still be worth your while to sell and not replace the debt.  You'd pay tax on the difference but shelter the rest.

2. Don't sweat the time frames.  Just be diligent.  Real estate is a commodity and there's always properties out there that make sense.  If you can put a contingency on the property you're selling for an extended closing to accommodate your 1031.  That will buy you some time.  And don't forget that there's no penalty for starting a 1031 and not completing it.  So there's plenty of options for you.

3. Lastly, You do have to take title to property in the same entity in which you sell.  But you could partner up with someone else as tenants in common as long as you take title to the same amount you sold.  So if you sell for 1.1 you could partner up with someone to buy a 2.2 million multifamily as long as you take title to 50% of the property.