1031 question - single families into small multi

[Charlie John]

Hey BP,

I am curious about the specifics on a 1031 exchange. If I have 4 single family houses with 50k equity each, can I exchange all of them and PAY CASH for a 200k 4 unit? 

I know there is certain language about having the purchase or loan amount bigger than previous sales. Curious how his breaks down. Do I need to have a loan on the new, larger property? Does it even need to be a larger property? Could I exchange all 4 properties for 2 new single family homes and pay cash for them with exchanged money? 

My strategy is to brrrr single families and after a couple years, exchange them into single property without a mortgage. I have flipped 14 properties in the last 5 years. After purchase and renovation, I was all in at less than 70% ltv for almost every single flip. I am doing my own marketing for deals and have honed my craft there. The next step seems to be using that craft to create assets. Not reselling them right away saves a lot on taxes and I need to start building wealth.

Appreciate any information on this. Thank you! 

[Dave Foster]

@Charlie John Not quite is the answer i believe.   @Jaysen Medhurst is right that if those properties are worth $50K (which means you don't have any debt on them) then you could sell them and as long as the time frames for the 1031 overlapped you could purchase a new investment property for $200K

But I think what you may be saying is that you have $50K equity in them and there is debt and their value is greater than $50K each.  In that event @Blake Dailey is right.  It is the value and not the number of properties that is crucial.

In order to defer all tax you must do two things.  First you must purchase at least as much as your net sale (contract price minus closing costs).  Second, you must use all of the proceeds in the purchase (this is the net sale minus mortgage pay off).  So for example let's say your properties are worth $160K and you have $100K in mortgage on each of them.. Your net sale might be something like $150K (160 - 10 closing costs) and after mortgage payoff you're left with $50K each of proceeds.  Your responsibility if you want to avoid all tax would be to purchase at least $150K using $50K of proceeds.

If you want to combine multiple properties it is their aggregate value that will matter.  You can purchase less than you sold.  And you can take cash out.  But when you do the IRS says that you are first taking profit.  You pay tax on the difference but shelter the rest of the profit in your 1031.