1031 Exchange Questions

[Ashley Noethe]

So, I understand the overarching idea of what a 1031 exchange is, but have some questions ..

1) Do you have to roll over all equity you have in the property to the next deal? Or, just profit? For example - if you purchased a property for $100,000, put 20% down to have a loan of $80,000, then sold it for $150,000 .... would you have to roll all $70,000 of equity into the next deal OR the $50,000 that was profit above the purchase price? 

2) Talk to me about the like-kind property criteria .. so if you did this on a single-family it would need to be another single-family? does it have to stay in close proximity to the original property? 

We are in Iowa but ultimately looking to get into short-term rentals out of state. A super "justspitballing idea from my newbie real estate mind is if we could take equity we earned on a flip, get the down payment back, and roll the profit into property out of state we intend to use as a short-term rental. 

[Dave Foster]

@Ashley Noethe, Sorry the spit ball won't work :) . But you're close.

1. In order to defer all tax you must purchase at least as much as you sell.  And Use all of the proceeds from your sale in the next purchase.  So the IRS is letting you defer tax if you leave all of your equity and basis in the new property.  You can purchase less than you sell.  And you can take cash back.  But the IRS considers that each dollar you take out or dollar you buy down is first a dollar of profit. You would pay tax on the difference but shelter any remaining tax in the 1031.  What you call your original down payment the IRS is going to call "profit" and tac you on it.  

But you could do a full 1031 and purchase at least as much as you sell.  Then after the 1031 is complete you could refinance and pull out cash to repay your original down payment.  A refi is not a taxable event.

2. The part works fine for the spitball! Any kind of investment property can be 1031 exchanged into any other type of investment property. SF to MF or commercial or LTR to STR (I'm starting to feel like Robin Williams in Good Morning Vietnam). And the properties can be anywhere in the US or a couple of US territories.

You've got the basics of a good plan.  I think your only potential hang up is the valuations.  If you want to defer all tax you need to purchase at least as much as you sell.  But also, it doesn't have to be just one property.  You could turn this first sale into two vacation rentals.  Lots of possibilities.