Converting Equity in SFH into Multi-Family Strategy

Real Estate Broker · Greer, SC · Member since 2013 · 548 posts · 271 votes

6y

Can't sell one to payoff another without creating a taxable event. Using all of them as a down payment (exchange) for bigger property is possible. I've done it a couple of times. The key is educating the seller on how the houses are a quick path to cash. So make offers WITH the houses.

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

6y

@David Johnson, You can do that but there would be a taxable event of some sort. But I'd rather start with your goals which are to purchase multi family using equity in your current properties and I sense to own them with as little debt as possible.

The path suggested by @Jason Dillard will work as well and completely defer all taxes. So would a consolidation exchange where you tried to sell all of them within a compressed time frame so your replacement purchase can close within timelines that meet all the exchanges. This would work best if you find a good replacement property where the seller is willing to delay closing or give you a floating closing date.

One spin off that we've used with clients seeking to minimize both taxes and debt has been to spread sheet your portfolio. Identify the properties with the greatest equity and lowest profit/depreciation recapture. These are the properties you would sell without the 1031 if you wanted. They'll generate the least tax. The properties you have with the least equity and highest profit/depreciation are the ones you would 1031 using the proceeds from the regular sales to supplement your 1031 purchase. That would minimize your taxes and free up the greatest amount of cash to purchase your MF.

Other specific answers

3. There is no maximum down payment in a 1031 exchange. If you want to defer all tax you must purchase at least as much as your net sale and use all of the proceeds in the replacement purchases. As long as you do that you can add as much money you want to the proceeds to reduce your loan.

4. Every lender is different. But in general they like 1031s because there is generally a strong down payment that is easily sourced. But they may require that they see the money in your exchange account before getting too serious.

5. You can 1031 exchange any type of investment property and purchase any other type of investment property. The type doesn't matter.

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Alex Olson

Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes

6y

Originally posted by @David Johnson:

Hey everyone,

I'm currently in the process of evaluating real estate strategies going forward and attempting to convert the substantial equity I have in two single family homes into cash flowing multi-family properties seems to be an appealing possibility, but I'm not totally certain on how the process would unfold, so I figured I'd put it before the public for advice. Here's the situation:

Current Portfolio:
4 Properties Total
2 SFHs in Washington, DC, each worth about $530K (with loans of $180K and $200K, respectively)
2 SFHs in Baltimore, MD, one worth about $150K and the other worth about $180K (no mortgages)

Proposed Strategy:

1) Sell both SFHs in Baltimore using standard method

2) Use the proceeds to pay off as much of the DC mortgages as possible (for sake of the example, ~$280K, so likely all of one and a good chunk of the other)

3) Use the paid off house in DC (~$530K in equity) as a down payment for a 1031 exchange to trade up to a multi-family property

So, my main questions are:

1) Would this strategy even technically be possible?

2) Even if so, is there a better way of leveraging all the equity I have in the SFHs to trade up to more valuable, better cash flowing real estate?

3) What is the maximum down payment (%) that can be used for a 1031 exchange?

4) My experience with banks has been difficult since my income has been mainly derived from income properties and freelance work, so I'm curious how easy are banks to work with to get approved for a new loan with a 1031 exchange? (Currently my credit score is about 815)

5) Are there any special considerations for a 1031 exchange that converts an investment property that's residential (SFH) to one that is commercial (multi-family)?

Let me know what you guys think when you have a free moment.

Thanks in advance for the help!

make sure you select a really good QI (qualified intermediary) and talk to a good real estate CPA. What market would you be buying in?

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Converting Equity in SFH into Multi-Family Strategy

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