Where to put my 1031 exchange money. What would you do?

Question

I sold a highly depreciated SF Bay Area california duplex I have owned for more than 2 decades. I sold due to rent control and a bump in value but I hope I haven't made a mistake. About $48K in annual net income plus 5-6% annual appreciation. $1.7m sales price before expenses and $900K cash. Now I need to figure what to do with the money as my tax bill would be around $500K.

Been looking at multi family syndicate TIC, deferred sales trust, OZones, investigating markets outside of California. Still in the wealth accumulation mode for the next 5 years and don't necessarily need the cash at the moment although would like to develop income streams as I semi retire in 5 years.

My familiarity is in SFR and small residential. I have been flipping in Atlanta for several years and I am a 20 year residential appraiser. But looking to diversify into something more passive and don't know much about MF, commercial, storage,??,...

My 45 day clock started yesterday. So...what would you do?

Michael Wagner · Answer

Here's two quick articles on finding storage deals from a blog hosted right here on BP:

https://www.biggerpockets.com/...

Hope you find some value in them!

Brandon Bruckman · Answer

@Nik L.  I hear you.  Based on what you were making and your expectations you could get that in self storage DST land.  Harder in multifamily.

Jacqueline Gardiner · Answer

@Nik L. Do you already have a 1031 exchange intermediary involved who is holding your funds? That's a requirement prior to closing the sale if you're going to do a 1031 exchange. An OZ investment doesn't require an intermediary and only requires the reinvestment of the capital gain rather then the entire amount of the sale. However, the tax on your current capital gains will only be deferred for 6 years, so the 1031 is better for long-term deferment.

I was weighing some of the same options when I did my exchange a few years ago and ultimately went with two TIC investments. One turned out to be a big failure, while the other is providing cash flow, though at a relatively low cash-on-cash return.

You might consider two or three build-to-rent 4-plexes in another state with good professional management if you can find them.

Paul Moore · Answer

@Nik L. Congrats on a great investment!  If you have a 1031 teed up, I would at least have one DST as an option.  @Brandon Bruckman is your man to help you with that for sure.  If you missed that opportunity, you may want to consider a Charitable Remainder Trust.  It has serious limitations, but I used one 23 years ago and it provided great tax write-offs and a chance to give back at the end of my life.  Good luck!

Amit M. · Answer

At this point (since you already sold/triggered your 45 day ID window) STNL NNN is probably your easiest and safest option. Do you have a reputable broker working for you to review deals?

Joel Owens is a NNN broker who frequently posts here, who may be a good contact for you.

Nik L. · Answer

Thanks. I don't even know how to do this. Plus, I am in the SF Bay Area so am pretty much priced out of everything locally so it means buying out of the area. My brain is spinning trying to do all the research while still keeping up with my day job.

Noah Chappell · Answer

@Nik L. @Scott Wolf beat me to the punch line.. why don't you buy 4-5 triple net buildings? Maybe pick out the top 10 performing fast food chains in your area or in other select states, then go to a big broker and start searching for deals.

Felicia Feliciano · Answer

Not directed at OP.

People do your due diligence before closing......................lol.

Many times people end up buying Junk due to time pressure.

If worst come to worst and you pay taxes, you could investigate option premium selling.  With $400,000 you can easily make $100,000 a year.

Scott Wolf · Answer

If you're looking for passive income a NNN property can be a good option.  Cash flow may go down, but ease of management will 100% be there.

Marc Rice · Answer

Assuming you engaged your title company to make sure the funds were put in a 1031 intermediary, then I would look to 1031 into a multi-family that generates more cash flow than the one you sold. If you can't find anything locally I'd look to the midwest for more favorable returns. Overall, only you can answer the question of what to do with your 1031 funds to avoid the tax hit and increase your wealth.

Where to put my 1031 exchange money. What would you do?

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