Is it Worth Trying a Reverse 1031 Exchange?

Question

So, I just got my offer approved for the purchase of a small 10 unit apartment complex. My wife and I are not big time investors, nor ever plan to be, but we wanted to try to make a modest income from real estate, mostly for retirement. All that said, I already own a SFR. It is 80 miles away ina college town. We pay a management company. We owe 80k, it shows up on zillow as being worth 201k. Our escrow payments are $630, it rents for $1300.

The new apartment setup will cost $350k. 20%/70k on an equity loan. It brings in about $5500 a month right now, gross.

All this said, the first SFR is definitely a profitable investment. I am able to hang on to it. But the idea of simplifying my life and ust focussing on the apartment complex is tempting. Theoretically I could pay off $100k of that loan by selling the SFR and doing a revese 1031.

What is your guys' advice?

AJ Singh · Answer

Joe Edwards-Hoff Multi family is different than sfr. IMHO I would hold on the sfr till multifamily is stabilized I don’t know what your cost basis is but capital gains rate is only 15% you need to factor In the exchange holding costs to make a decision

Ned J. · Answer

See..told you someone more qualified would chime in :)

Mike Dymski · Answer

Yes, go for it if your gain and depreciation recapture are high enough.

Lane Kawaoka · Answer

Joe Edwards-Hoff after doing a big 1031 a few years ago to go into turnkey rentals I totally regret it. You only kick the can down the road and the timeframe is not practical. Also you cannot 1031 in syndications.

Dave Foster · Answer

@Joe Edwards-Hoff, @Will F., @Ned Jackson, the Statutory order of the 1031 exchange is always that you close your sale before you close your purchase - the order is buy-sell. This does not change in a reverse exchange but it allows you to control the new property before you close the sale of your old property. It's awesome if you find the perfect replacement property before you close the sale of your old property. Or where you want to build your own replacement property. Or where you can find replacements that are much cheaper and need significant improvements.In a reverse exchange the QI takes title to the new property in a special entity (usually an LLC) called the exchange accommodating title holder. The EAT holds the property for up to 6 months until the client has sold his old property. then he uses his 1031 proceeds to "buy" the new property that the EAT is holding.Because of the level of complexity these are relatively expensive. And you as the client have to provide the funds to purchase the new property either through cash or a down payment plus traditional financing so that can be more complicated as well. But well worth it in the right situation.In any event you are still completing a regular 1031 exchange as you are selling first and then buying. Its just that your purchasing a property that is being held for you by your QI.

Joe Edwards-Hoff · Answer

Check this out, the REVERSE 1031 exchange. https://www.1031exchange.com/reverse/

David Zheng · Answer

better hurry and try to sell that SFH now. Maybe delay the closing on the other and try for a double close.

Ned J. · Answer

No expert here, but I'm pretty sure a 1031 only works one way........ you sell one and then use the proceeds to buy something else for equal to greater value. The purchase property has to be identified within 45 days, and closed in 120.If you purchase the bigger more expensive one and then sell the smaller, cheaper one, all you can do is use the proceeds to pay off the loan quicker...... you cant reap the tax benefits after the fact.Unless I'm missing something.......another more qualified person will chime in soon....

Joe Edwards-Hoff · Answer

So, I may be using the wrong term (but yes, in Washington, I found a good deal), but I thought a traditional 1031 is , I sell my sfr, then go buy something bigger. And the reverse 1031 is, I bought something bigger, so now I sell the sfr to help pay for it. If it is the latter, then I was wondering if it'd be wise to pay off a large chunk of the apartment while I still could make use of the 1031 tax benefit. As far as I understand, if I sell it later I'll have to pay for the income on it... I'm ok with holding both, but I figured it'd be sweet to pay off the apartments sooner. Again, I'm not building an empire, I just want a few buy and holds to help offset my income.

Will F. · Answer

First, where are you finding a 10 unit apartment complex for $350k getting $5500 gross/mo ?? My guess not in Washington? is it in Midwest?I'm in a similar situation trying to upleg into a multi by selling off an SFR with about $600k equity.I don't understand what you're trying to do though? Why do you need to do a reverse 1031 exchange to pay off your loan on the SFR? Why not just do a 1031 exchange from the $201k SFR directly into the $350k 10 unit apartment.