1031 to an owned property?

[Jamie Brayton]

I'm new to 1031s. Are there any creative rules that might help us in the following situation? Are there any other options I am not thinking of?

Background: As my husband and I consolidate properties within our family business, we want to get rid of non and low cashflowing properties. We are interested in selling a second home/vacation rental. We would like to use the money to rehab a warehouse we already own free and clear and convert it into an already approved apartment complex. Similarly, we're considering selling a strip mall with a large mortgage and lower cash flow to finish two more floors of storage units that have no mortgage. 

Is there any way we can reduce or avoid taxes on the capital gains if we roll the gains into other properties?

[Dave Foster]

@Jamie Brayton, Unfortunately that information is dated and no longer viable.  It's what used to be called a leasehold exchange.  And it allowed you to construct improvements on property you already owned by "creating" a new property that was actually a 30 year capital lease.  The IRS has taken such a hard stance on such a structure that almost no one without a $50K retainer with an attorney will even think about them.  They were wonderful 2002 - 2008.  But like all good things the IRS wouldn't leave well enough alone.

So the answer is that no you can't exchange into property you already own.  And you can't exchange into improvements on property you already own.

I think that you're spot on in your desire to consolidate and trim the fat from your portfolio.  I call it a form of defensive investment and very appropriate for late in a market when you're wanting to shore up returns and eliminate some risk.  There's a couple of ways you can do that.

1. Sell and pay some tax on a few without a 1031.  Although not paying tax a a good goal, there are times when strategically it makes sense.  Use the after tax dollars to improve your other properties and shelter . yourselves from some risk.  All other things being equal you'll want to sell the properties you've owned the lease amount of time (depreciation recap issues) and have the least gain in but the greatest equity.  This frees up the greatest amount of cash with the least amount of tax and you then use that to improve your existing properties.

2. Go ahead and 1031 but do so into better performing properties.  And as you're doing that keep an eye to what properties are your best go to's.  Use debt to pay those off while leaving the maximum leverage on the properties you're not so keen about.  By owning your best properties debt free you eliminate most of the risk of ownership.  And yet you still get the bounce of leverage by having it on your other properties.