Trying to understand 1031 Exchange

[Rhonda Louis]

My husband and I are selling 7 duplexes.  We are wanting to do at least a partial 1031 exchange, but it is becoming very overwhelming.  We close in less than 2 weeks and we have not decided how many of the properties we want to put in the exchange.  My CPA does not have the time to meet with me, and told me to exchange all of them.  But if we put all of them in the exchange, we will have fees for each of the properties we put in, and we are pretty sure we would like to keep some of the profits out, pay the taxes on them, and pay our mortgage.  We would like to do this, so we can have a little more financial freedom!  My question is this.

If we are selling each one of the properties for $253,000 and I do a 1031 exchange on 5 of them.  Can I lump these together?  For instance I saw on roofstock someone is selling their portfolio for around 1.3 million.  Can I buy a portfolio that has many single family homes?  So I would be purchasing more than 5 homes. (I am not saying this is what I want to do, I am just trying to figure this out)

Likewise if I 1031 exchange 3 properties, but I see one multifamily property at $800,000 can I exchange all 3 properties into that multi-family property?

Also, this sale was not expected we were planning on these properties being our retirement income.  However, someone came up to us made us a good offer and we accepted.  So now it is a bit intimidating trying to figure out our next step.  What our next investment should be.  If anyone has any advice, we are all ears!

[Dave Foster]

@Rhonda Louis, It's a confusing complicated process isn't it.  Fortunately it is the job of the QI for the 1031 to guide you through this process to a successful conclusion.  The QI is in addition to all of your regular professionals.  And their only role is taking you through the 1031.  

If you don't have a QI yet now is the time since you're facing some decisions and the QI has to be in place prior to the closing of the sale.  If you do have a QI they need to be actively guiding you through these questions and scenarios.

So that being said,  Here's some quick answers.

1.  If you are selling the seven on one contract to one buyer it is possible to select the ones you want to exchange and treat as one sale and one exchange.  So possibly no multiple fees.

2. the rule of thumb I tell my clients is to sell without a 1031 the properties that have the greatest equity and least profit and shortest hold time.  This will minimize your tax on those sales.  And maximize the amount of cash you pull out.

3.You can combine sales (whether it can be treated as one 1031 or must be treated as several) to purchase a larger asset or more real estate.  

4. Probably the biggest key for you is that you can allocate your sales proceeds any way you want.  Buy a property or two for cash and use the rest of your proceeds as down payments on other properties.  This can a great retirement plan because it eliminates a lot of risk.  You own a couple properties for cash so in a down turn you simply adjust rents and buy a few less Starbucks coffees without worrying about a mortgage to keep up

5. If you complete a full 1031 exchange and purchase as much as you sell and use all of your proceeds to do that it would be possible for you to then do a cash out refinance of one or more of them.  This would get you the cash you need yet you would defer all tax in the sale since cash out refi's aren't a taxable event.