In need of help with 1031 Exchange

[Luis Escobar]

Hi BP community. I am in need of help. I was in the process of purchasing portfolio of properties and in the due diligence period I got access to financial reports and after further analyzing performance of properties I am having doubts. Properties are located primarily in C class neighborhoods and an average of 30k. I have read a lot cautioning investors to do this as it often results in higher cost of repairs and vacancies. In reviewing financial statements I see that same trend. I am still in the process of getting more information but I am now concerned that if this fall through that I will not be able to complete a 1031 exchange that defers all of the taxes. Here is my scenario and questions about 1031 exchange:

Original purchase price = 240k (owed about 209k when sold)

Sold property for = 438K

After subtracting fees my understanding was I needed to find replacement property valued at 415k

Funds I have in 1031 exchange account is 208k

My understanding is that to fully avoid capital gains tax I need to reinvest all 208K plus find properties valued at a total of 415k. Is that rightt? If so, then my questions are the following:

• What if I do not buy anything? Does that mean we pay taxes on the 208k profit? Or on the 415k total sales price minus selling fees?
• If I purchase property for 130k to do a partial exchange would I be taxed on 208k-130k? Or would the tax apply to 415k – 130k?

Insight on this would be much appreciated. Thanks!

[John Umphress]

We did a 1031 exchange last year and are likely to do another soon.  Had an experienced 1031 intermediary and a RE attorney.  Both said that sometimes it is preferable to take a hit on taxes than to purchase a bad piece of property.  We ended up with a pretty good property but also had some boot - will be writing a check to the IRS next month.  Just didn't have a great feeling about the value of one of our other identified properties.  Silver lining is that we have some cash available.

Doing it different this time.  Even though we are 45 - 60 days out from closing (buyers will work with us on the closing date to ensure we can line up replacements,  I am beating the bushes right now.  If things go well, we will close on our replacement property prior to the 45 day deadline for identifying replacements.  Have already spoken to the bank on the amount of leverage they are willing to provide.

If the 45 day identification deadline is looming, you might want to look for a single duplex or fourplex that will cash flow. Might be more doable (with less stress) than multiple SFR.