1031 Exchange Question

[Darrell D.]

Hello. I do most of learning from podcasts and videos from YouTube. I feel that I have a good plan for myself by selling several of my homes and buying a multifamily unit with a 1031 exchange. However I feel somewhat stuck. I would love to coordinate the purchase of apartments but I don't know of any seller who would wait for my properties to be sold. So it would seem a group of investors would be beneficial, such as Lifestyles Unlimited Inc. At my current level of experience, I would benefit most from being a preferred member but it costs $20k... seems a but much and they won't clarify rates of return when I email them. So I'm wondering how other people coordinate a 1031 without club memberships. Did you know other investors/sellers? Did you sell your property at a low price to get rid of it quickly? Did you sell more than one property for a single 1031 exchange? PS I think this would be a good blog topic... breaking down a 1031 exchange process.

[Dave Foster]

@Darrell D., The 1031 window is actually only 180 days.  Still a lot of time but you've got to be active.  The timing that can kill you is the 45 day identification period.  From the day you close your sale you have 45 days to identify  your potential purchase.  Because the list goes hard on day 46 it is almost imperative that you get your new property under contract prior to the end of the 45 day period.  And as Bill illustrated in a couple of examples a contract to purchase can even happen before you close your sale if you can get the seller to agree.

However, in a sellers market the seller has the power.  That's why I see more 1031 investors exercising their power on the sell side.  A couple of options would be:

1. Sell the properties as a bulk sale to an investor or group of investors.  This actually cuts the expense of and simplifies your 1031 since it can be treated as one exchange with one timeline.  You may need to take a hair cut but once you compare the cost of individual exchanges at $700 - $1000 a pop, the cost of separate closings, or the cost of a reverse exchange at an additional $3K - $5K and a discount to simplify your transition might not be such an onerous thing.

2. Sell your property with contingencies and a delayed closing.  If you're truly looking in an investor world for buyers then there are many investors who will not mind waiting at all to close on their purchase from you - particularly if it means they get a negotiated price now.  And don't forget there's a world of 1031 investors like yourself who are all wishing a seller would give them a contingent long closing.  The daisy chains of 1031s on both sides is once again growing.  

3. The reverse exchange can be a powerful way to lock up your new asset, particularly if the new property may need some extensive improvements or is much more difficult to find than what you are selling.  But make sure that your true difficulty will be locating the replacement.  The safe harbor Reverse exchange of Rev proc 2000 - 37 also has a limited shelf life.  From the day your QI takes title to the new property you have 180 days to complete your sales.  

4. A placeholder property - This transitional strategy is starting to take hold as available inventory tightens up and thoughts of a pending correction start to surface.  the investor uses 1031 to buy into a fractional stable tenant-in-common property but one with a limited time horizon or with a guaranteed buy back after a period of time.  The 1031 investor must purchase the property (or the tic interest) with the intent to hold  but after a year or two when the market settles down or transitions the buy back is exercised and the investor 1031s out into what they've been looking for.