Rehab or 1031 Exchange?

Question

I have a rent control duplex that is about to be empty in both units and I’m trying to decide whether to rehab it and re-rent it or do a 1031 exchange. The duplex is almost 100 years old with lots of deferred maintenance. Since it is going to be empty and it is a rent control property, if I were to sell it I believe the time would be now. I own it free and clear. The only problem is that it is a family home for 3 generations, so it has sentimental value to me.

I wonder what anyone recommends in terms of assessing whether to rehab it or 1031 exchange? Termite inspection? Home inspection? I want to keep it but I am worried that if I start renovating it I will find expensive issues I’m not aware of and it will cost more than I planned. I’ve also never done such a large renovation so there is fear of things going wrong.

Albert H. · Answer

@Hubert Kim Your reply is very helpful, thank you.

Hubert Kim · Answer

Albert, since you are considering what to do with a valuable asset that may have considerable income and tax consequences, I suggest plenty of research on what your options are. Start off with Google, but it may be worthwhile speaking with any or all of the following people:

• Financial planner - if appropriate, may be able to help plan on your short-term and long-term goals
• General contractor - will be able to provide an estimate of costs associated with rehab of your current property
• Accountant - may provide tax consequences for either rehab or 1031 exchange
• 1031 exchange company - will detail the process of correctly performing a 1031 exchange
• Real estate broker - will help you sell your current property and locate an appropriate replacement

That said, depending on the location and details of your property, it may be a good time to sell.

Bjorn Ahlblad · Answer

@Albert H. if you are buying and selling in the same area it should equalize? I think looking for a building where you can increase utilization and get more doors would be the way to go, sometimes LL's just get tired.

Albert H. · Answer

@Bjorn Ahlblad Thank you. Since there is a high demand for MF do you think that will make it harder to exchange into a good building? I am in Southern California.

Bjorn Ahlblad · Answer

@Albert H. Welcome to BP. I would unload it-most markets are in a high and people are knocking each other down for MF. Half way through the renovation of a century old building is no time to become sentimental-or it will turn into a money pit.