1031 Exchange After Closing On New Property?

Question

So I have a rental. It has appreciated a good amount and I am ready to sell it for a decent profit various reasons. We won’t go into them.

However, I just reached the decision to sell it an hour before posting this (so that part of the process has barely started).

I have an eye on a specific property I really want, but it just went up today and already has 32 saves on Zillow. Simply put, it will not last for over a month.

Therefore, IF I want this property, I cannot wait for my current rental to sell, get the funds in the 1031 Exchange’s escrow, and THEN pursue this house, as it will certainly be gone.

Therefore, what are my options?

Could I close on this new rental’s by using my own cash on the downpayment, and then retroactively use this property for that 1031 from the property I’ll be selling?

I’ve never done a 1031 before and every Google search along the lines of “retroactive 1031 exchange” is about reversing the sale of a house you just bought, via a 1031.

I’m talking about buying a house weeks before your old rental sells, and somehow having that whole transaction fit under one 1031 exchange.

Last thing I would want to do is pay pay the new property’s downpayment in cash, and then turn around and find out it doesn’t qualify for a 1031 since I bought it before selling the first house, and then also having to go buy another house with the 1031 funds, and never recoup my own cash I used on the new rental.

Hope that makes sense, I will be happy to clarify if it doesn’t. Thanks in advance for any help!

Dave Foster · Answer

@Justin Thind, by law you cannot take title to your new property before you close the sale of your old property in a 1031 exchange. A reverse exchange does not change that. In a reverse exchange we (the qualified intermediary for the 1031) takes title to the new property and can hold it for up to 180 days while you get your old property closed so you can then do a regular exchange selling your old property and taking title to the property we are holding.They sound great and can be. But. they come at a very steep price of thousands of dollars more than a regular exchange. And you have provide the money to purchase the new property. And regular conventional financing will not work. It must be private or hard money lending, or cash from your own resources.But, while you can't take title to the new property you can have it under contract before you close the sale of your old property. So, if it is going to sell quickly you might want to try to get it under contract now with as extended a closing as possible. Even offer additional earnest money - possible non-refundable, in exchange for the extended closing. Then get your old property sold promptly.As a. last resort pursue the reverse exchange then.

Arn Cenedella · Answer

@Justin ThindAlways take what you see on BP with a grain of salt and verify independently. There’s a lot of misinformation out there that is presented as knowledge.One can do a reverse exchange where one buys the new property first and then sells the original property after - all via a 1031 process. https://www.investopedia.com/terms/r/reverse-exchange.aspReverse exchanges do exist and they are “legal”. That being said, they are extremely costly and expensive and generally do not make sense for smaller transactions. Contact any 1031 intermediary and get the 411 - trust me it’s more accurate than much of what one sees on BP. 😀I use First American Exchange - reach out to them and they will set you straight on how it all works. Plenty of other good 1031 companies out there too.

Wayne Brooks · Answer

@Dave Foster can explain…pros and cons.

Erica Calella · Answer

As you can see from the posts prior to mine, 1031 exchange transactions are very complicated and its best to discuss with your tax advisor/ qualified intermiediary before you make any decisions at all. One misstep can throw off everything and result in a lot of tax consequences. I have also used First American Exchange and couldn't recommend them enough!! They helped me throughout the entire process during my first 1031 exchange and I will be using them again in the future.

Melanie P. · Answer

It's not possible to do a 1031 exchange retroactively. You could get your rental listed today and make your offer with a Home Sale Contingency. If you really want the property and don't mind a small gamble put down an amount of earnest money that you will not be upset to lose and that if you were in the seller's shoes would make you feel OK about taking the property off the market for 60 days and make it non-refundable to be conveyed to Seller upon offer acceptance. If you can't get your house sold you lose the EMD. But you're asking someone to hold a piece of real estate for you - that is worth some amount of money if you are truly serious.

Melanie P. · Answer

@Arn Cenedella Nothing I said in my post above was incorrect. Perhaps the words "retroactive" and "reverse" are too similar for your mind to draw the distinction. In this case they have vastly different meanings. 1031 exchanges cannot be done retroactively. A reverse exchange is not the same as a retroactive exchange. In DeCleene, 115 T.C. 457 (2000) the taxpayer closed on a vacant lot and then transferred the lot to a third-party while improvements were constructed. Because the taxpayer had title to the land when it was transferred to the third-party he was said to have engaged in an exchange with himself and the deferral was denied. Reverse exchanges are complicated, expensive transactions that have not had specific procedures fully approved by the IRS. The solution I outlined above is a cheaper, faster and more likely to result in achieving the outcome sought by OP. Have a nice weekend.