1031 exchange into BRRRR. Let's talk strategy!

[Account Closed]

Hello BP community!

I'm still fresh in my Real Estate life, but I'm looking for ways to get creative with buying and selling properties. Currently my favorite strategy is the BRRRR strategy, I'm looking to tackle BRRRR with a buy-in-full approach. However, I currently do not have near enough to buy a property in full so I was doing some research and a thought came across. If I were to get a property on a mortgage, do all the necessary repairs, paperwork, screening, etc, hold for a certain period of time to meet my needs, then 1031 exchange into a property that I could buy in full, and then start my BRRRR strategy that way, do you guys think that would work? Not sure if that's an old strategy but that's one that I believe could work, but I could be wrong. Any and all thoughts and opinions are welcome! Sidenote: I'm looking to get into rental properties, starting with a duplex.

Here's a walk through of what I mean, this will be extremely simplified:

First Property: 40K (Repair money I can get creative with)

Purchase: Conventional Loan

Hold: One year

After One Year: Sell Property and put capital gains through 1031.

Next Property: 40K in full (Repair money I can get creative with)

After finishing the second property deal, I can begin my BRRRR strategy.

What's you guy's thoughts on this? 

[Dave Foster]

@Tarl Yarber You're right - the Reverse exchange can be an incredibly powerful tool.  You probably want to be careful with your use of valuations in the Reverse exchange you're doing. I don't think your QI is correct. 

They took title to your new property appropriately using $45k of your exchange proceeds as the down payment and are using the remaining $75K for the repairs. So far so good.

The problem is that you sold your old property for $275K and your exchange QI purchased the new property for $165K and added $75K to it in improvements. That makes the property worth $240K when you take title to it. You can only count the actual purchase price and actual improvements in the value of what you purchase in a reverse exchange. Its appraised value is irrelevant (except for you in the future :) . 

So one of three things is going to happen.

1. Either you'll purchase the property from the QI for $240K and you'll have taxable boot of the difference between your sale price of $275K and the purchase price of $240K.

2. You'll have to purchase another property worth at least $35K to equal your reinvestment target.

Or

3. Your QI sells the property to you for $275 or more based on appraisal. This leaves them with two problems. First they just profited off your money. And secondly they just profited period. So now they have a taxable event. Both of those are inappropriate.