Selling my my rental in Oregon, 1031 exchange one possibly two SFH in North Carolina

[Austen Carroll]

Hey BP fam, 

My PM notified us our tenant in our SFH rental in Salem, OR is purchasing their own home and will be moving out the end of May or June. Selling this unit has been a discussion for a couple years now and this vacancy might be the right time to do it. Deferring capital gains tax via the 1031 exchange into another property seems the most beneficial and efficient. I know little about 1031. I know we'll need to use an official intermediary, 45 days to identify like/greater properties, and 180 days to close.

question #1: Is anyone savvy and familiar with 1031 willing to chat? Wanting to learn the basics and also to gather some previous experience and wisdom, things you wish you did or didn't do. mistakes to avoid etc. Or can anyone list some good resources online where I can read up on it all?

I'll write some context on the house we're wanting to sell and why.

Bought 760 E st NE in Salem Oregon back in 2016 for $168,000. With a quick paint job, minor cosmetics, and landscaping the house rented quickly. Since 2016 we've had it rented 99.9% of the time. It's been a golden goose laying eggs. Rent has been almost double my PMI so it's cash flowed extremely well over the years with no large maintenance costs. With the market and demand property value has increased a lot. Zillow says $317K I know zillow isn't the most accurate, nonetheless, it's value has increased so much. If we sold for 300K-105K (mortgage balance)= 195k. divided by my monthly net profits about $650. It would take me 25 more years to see the same return. Additionally, I don't live in Oregon anymore and frankly want to just exit that market area because I can self manage rather than pay a PM. and looking to benefit from the growth here in NC.

Targeting the Raleigh expansion. We're seeing massive property value growth in Raleigh and bordering towns south down highway 1.

Winder Station is a new large development selling new builds/lots starting in the mid 200K range in Vass NC. talking with agents in the area, people from Raleigh are willing to commute, as well as military families stationed at Ft Bragg. So I'm starting to considering purchasing one of these "build" contracts. construction is projected to finish in November 2023. 

question #2: Does anybody have experience investing in these new build developments before the houses are even finished? is this model a strategy used by large developers to minimize their risk levels? If the developers don't "pre-sell" enough of these houses will the project not be finished?

kind of a long post. just wanted to put as much info I can. I know there aren't a lot of exact numbers in here for you to go off of. I'm more trying to understand the grand schemes and risks involved if that makes sense. I'll be crunching numbers best as my little brain can lol but that's why I rely on the pros to keep me straight.

thanks!

[Bill B.]

1) you can’t use capital returned divided by months of profit liek that, except maybe in your head, especially after selling costs and taxes. But I can lay out some basic numbers. If you want Mei detailed info and an expert send a PM to @Dave Foster he’s been helping people here for years and is a QI. 

2) if you sold for $320k and paid roughly 10% in closing costs you’d end up with $288k. That’s how much you have to buy to not pay any taxes. You’d also have to invest the the $93k in “cash” you receive (without ever having control of the money of course.)

3) failure to do either of these things causes taxes to be due. 

4) ballpark taxes for not doing a 1031 would be capital gains tax on the $288k - 168k, or about $18k, plus 7 years of depreciation recapture, maybe another $8500 (I used 80% of $168k, divided by 27.5 years, times 7 years, times 25%) for a total of about $26,500 plus state income tax. (Likely the higher rate of the state the property is in and the state you live in.)

[Dave Foster]

Kind words @Bill B..  @Austen Carroll, You're on the right track.  The 1031 will let you move your real estate to anywhere in the country and into any type of investment real estate you want.  There are a couple of keys to making these new construction projects work with your 1031.

1. You can't take title to the lot.  You can only go into contract for the entire build.  So that when you actually take title you are taking title to a completed house.  Because you cannot exchange into improvements on property you already own (the lot).

2. The construction has to be done so that you can take title to it within 180 days after your old property closes - no exceptions.  Your 1031 exchange can only run for a maximum of 180 days.  It's OK to be under contract for your purchase long before your sale happens.  But you only have 180 days after your sale to complete your exchange.

I'll reach out via pm to put some more resources in your hands.

[Austen Carroll]

Thanks @Bill B.

I will absolutely PM @Dave Foster

this is why I love BP, I've read enough to get me interested, and I've definitely read enough to get myself in trouble haha. Also I read something about the 200% rule, am I correct in thinking I cannot buy a new property more than 200% of the sale price on my rental?

[Dave Foster]

@Austen Carroll, Nah, that has to do with the identification and number of potential properties.  It's a weird quirk of the regs.  But you can purchase as much value as you want.  Colleague request has been sent :)

[Bill B.]

3. 200% Rule.

If the taxpayer wants to identify more than three properties, he can use the 200% rule. This rule says that the taxpayer can identify any number of replacement properties, as long as the total fair market value of what he identifies is not greater than 200% of the fair market value of what was sold as relinquished property. First American Exchange recommends that taxpayers build in a “cushion” by identifying properties that are worth less than what is permitted, in case some properties are later determined to have a higher value than what was originally estimated.

4. 95% Rule.

There is another rule that is not commonly used by investors. The 95% rule says that a taxpayer can identify more than three properties with a total value that is more than 200% of the value of the relinquished property, but only if the taxpayer acquires at least 95% of the value of the properties that he identifies. Essentially, the taxpayer will need to acquire everything that he has identified to make this work, and that is why it is not relied on too often.

You can identify a building worth 2000% if you only identify 3 or less. You can identify any 3.if you identify more than 3 you want to have their values under 200% otherwise you have to buy them all. (Identify 10 and buy 9 doesn’t count, you’d need 19 out of 20)

[Austen Carroll]

that helps a lot. I thought I couldn't buy anything over 200% value of my sale price. that's good to hear. probably won't be buying 19 out of 20 properties just yet either haha maybe next year :)

[Bonnie Low]

I can totally understand why you want to get out of the property in Oregon. But out of curiousity why are you looking to buy a property that's under development rather than just buying something that's already built. There's tons of opportunity throughout Raleigh and much of NC with all the growth. I would not want to go into a 1031 on a property that isn't complete. Ask a 1031 exchange expert, but I don't believe you'd be able to qualify a property under construction that doesn't complete within the 1031 deadline and they are NOT flexible. 

[Austen Carroll]

@Bonnie Low,

right now because of my work I'm only looking for turn key properties. and we would like to buy close enough to where we live that we could self manage. The Winder Station development sorta fell into our laps and it did check a lot of boxes. though I'm still not committed. talking to our friend/agent, she says providing the builders deposit just locks in out house. we wouldn't close or do anything until the house was finished. And their projection is Nov. with having to close in 180 there's not a lot of room for error. and we all know construction gets finished on time every time lol

[Austen Carroll]

Alright I have another question.... I've scoured the internet and can't find a concrete answer. It has to do with my choice of replacement properties. 

Can I buy  two or more properties that are below the value of my sale, but who's sum is greater?

I sell my property in Oregon for $300k

I cannot 1031 a new property for $250K because that's not equal or greater.

but can I 1031  TWO properties at $250K each, whos sum value be $500K?

I would use the Oregon property funds split 50/50 to buy two properties.

[Dave Foster]

@Austen Carroll, You could buy one cheaper property and pay tax on the difference.  Or you could buy two or more properties.  And as long as their aggregate value is equal to or greater than the net sale you will still defer all tax.

And you can allocate your proceeds anyway you want in those multiple purchases.

[Austen Carroll]

thanks so much! that gives me more options

you're the best @Dave Foster