Los Gatos, CA · Member since 2017 · 131 posts · 17 votes
I may have managed to find a buyer for my Georgia SFR and get it sold 'before' I close escrow on a condo in Hawaii. So, I could potentially do a 1031 exchange. Crazy question but I'm wondering if it makes sense to do it and if it's even possible given all the variables. I 'think' that one of the rules with a 1031 exchange is that you can not live in the place for some number of months. The new condo in Hawaii needs a lot of work and I plan to move in while making the improvements. The good news is that the place that I'm buying is actually two units that were merged into one large unit and I plan to revert them back to two units. So, wondering if this would provide a loop hole?
Also, I'm debating if I still want to do this whole land lording thing anymore. However, the ability to write off the cost of improvements is tempting, right? The likely hood that I will rent the unit down the road is a high one especially given the location. My expectation is that I will live in one unit, and keep the other unit for friends and family and occasional vacation renters. Would love to hear your thoughts.
In 2018 I sold 7 sfhs and had 200k of capital gains. I just offset it with 200k of passive losses that I built up by going into syndications.
The 1031 exchange is a method of pushing forward the taxes due on the capital gains of a property. You have 45 days to identify replacement property that 180 to close on said property(s).
Its a way of kicking the can down the road with taxes. I personally that you have to pay taxes at some point unless you are going to take it to the grave with you which is not very practical due to the following.
1) The 45 days is almost impossible to execute. To be able to line up a deal that is “hot”. Experienced investors spend an average of 18 months to find that elusive first apartment. Now if you are buying lukewarm deals… then be my guest. But in this seller's market, I think its a way to lose everything.
2) Most investors that I work with are high net worth and able to cashflow income minus expenses over $30k a year and have over 50K of liquidity on hand. I believe that most people, unless they are talented at being an elite investor, should just be an LP role in a syndication due to the scalability and being able to spread their capital across different leads, business plans, asset classes, and geographical locations. That said a 1031 exchange will not allow you from going from real property to an LLC (ownership in a syndication). Although you could do what is called a Tenant-In-Common (TIC) arrangement where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It's possible but from the syndicator's perspective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money say 50% of the raise then that might tip the scales in your favor). We would do a TIC with you but you would need to bring in more than 1-2Mfor it to make it worth the administrative burden.
Again when we sell the asset in 5-10 years anyway you will be in the same but worse predicament. Take advantage of bonus depreciation now.
There are reverse exchanges and other more exotic exchanges but I personally not sold on the concept when the IRS comes knocking. I am not a tax professional but I feel it is tax evasion.
As a LP investor in syndications deals large enough to pay a guy 5-10K we do cost segregation in order to get bonus depreciation and write off a huge portion of the taxes from exiting the last deal. Basically bones depreciation has made 1031s obsolete.
The order in which suspended losses are deducted is:
1. To first offset depreciation recapture and gain from the activity that was sold.
2. If the suspended losses are in excess of the total gain, the remaining suspended losses will then offset ordinary income.
3. If the suspended losses do not offset 100% of the gain from the activity that was sold, you may use suspended losses from other rental activities to offset the remainder of the gain from sale.
This is detailed in IRC Sec. 469(g)(1)(A). And if you want to have a wild Wednesday night, here's an article that explains it in-depth:
@Katrina Cabral, There's around 500,000 1031 exchanges done each year. So there must be some reason.
In your case it's really a golden opportunity if you have a lot of gain or depreciation that would have to be recaptured.
1. Rev Proc 2008-16 gives you a safe harbor for personal use - They will guarantee your investment intent if you use the property personally less than 2 weeks a year or 10% of the days actually rented not counting days you stay there working on the property. So you're fine by that standard.
2. These numbers are totally made up but you'll understand. If your old property is being sold for $300K and you are buying the new property for $600K you can absolutely convert it into two units and live in one of them and renting out the other. You will have sold $300K of investment real estate and purchased $300K of investment real estate. So that could work as well.
