How do I use a 1031 exchange

[Angel Moreno]

I’m selling a single family home to my tenants and want to use he profit to buy my first duplex. How can I use a 1031 exchange to avoid paying taxes. Is this something I have to hire an attorney for? Also, does all the profit have to be used in the DP or can I use it to renovate the property I buy as well?

Thank you all!

[Dave Foster]

Thanks for the shout out @Jason Shackleton.  @Angel Moreno, a 1031 exchange will allow you to sell that property and, using the correct process, purchase new replacement investment property while indefinitely deferring all tax and depreciation recapture.  In fact you get to use that deferred tax to generate income for yourself.  So the more tax you can defer over time the more income you'll make over time from the deferred tax.

A 1031 does require the use of an unrelated 3rd party to the transaction called the qualified intermediary.  Usually these are firms like ours made up of attorneys and accountants.  But we can only administer the 1031 exchange for you by law.

There is a way to use profits for improvements.  But it is the deep end of the 1031 exchange world called a reverse or improvement exchange.  Because you cannot exchange into improvements on property you already own.  So the QI must take title to the new property first and hold it while you do your improvements.  So if they're not a lot you may be better off either paying a little in tax and doing the improvements outside of the 1031.  Or using all of the proceeds in the down payment and then refinancing to pull money out.

I'll reach out with some more resources for you.