Has anyone used a 1031? Is it complicated?

Question

Hi there. I may be selling a rental property in NJ and use the proceeds to buy 2 or more properties in another state. I was wondering if any of you have experience with using a 1031 and how it works. Who can the seller have hold the funds upon the sale and while they search for another property? I'm a little confused about the 45 day and 180 day period. Does one have to put an offer in by 45 days or just find a property? What happens if you are not able to meet the deadline? I'm also wondering if it's even worth it to attempt it and how one would determine if it's worth it. Any input and/or advice would be greatly appreciated.

Thank you!

Dave Foster · Answer

Chris L. said and letting them lead you through the process is the easiest thing in the world.

4. Starting an exchange and not finishing it carries absolutely no penalty at all.  The way the law reads your total exchange period is the sooner of 180 days or the date of your next tax filing.  So if you start an exchange that doesn't work out it will always end before your next tax return so it just doesn't get listed on the tax return.  You pay the tax.

I guess the philosophy I've always adopted is one of effort and return.  Anything that brings a good return usually requires effort.  Sometimes it's a little return for a lot of effort :(  Sometimes it's a lot of return for a little effort :)  Being able to shelter 20% - 40% of your profit by being guided through some hoops but actually doing the exact same selling and buying I would be doing anyway seems like a great return for little extra effort.

Mark Creason · Answer

Sam,

If you do not close in the time frame, it isn't a violation, you just have to pay the taxes.

Mark

Joel Owens · Answer

My experience with 1031's is buyers screw around too much at the beginning and then scramble at the end.

They do not work early and diligent enough in the process to have realistic expectations of how things work.

They have not bought in so long and so they have a fairy tale idea of what property they can find for XX return. As those 45 days winds down they start scrambling and ultimately pick a crappy property due to poor planning.

This is why on the commercial side when someone wants to buy something with a 1031 they have to follow the steps and the plan. If they are all over the place I will not take them on as a client as I know what will happen in the buying process.

Jeff B. · Answer

You select an Accommodator BEFORE the purchase or replacement, because if you take delivery of the sales proceeds, you just killed the 1031.  The Settlement Funds go to the accommodator who creates an escrow account to be used for the purchase of the replacement properties.

Yes, the 45 days and 180 days is a rat race.  Not too hard to make the 45, but the 180 can be a killer, especially when there are inspection issues (Taking AS-IS is an effective means to expatiate the process) or the seller starts playing games because you are under the gun to close on time.

On that last point, I had to threaten the seller's agent, my own agent and the seller himself as he was fraudulent when signing the "1031 Cooperation Agreement".  It took (4) lawyers in his home for (4) hours to make him understand the consequences of failing the 180 days.

Sam Shueh · Answer

Nop. In our area we use a 1031 service the buyer needs to sign paperwork. The sellers pay like <1K and give you the paperwork for cpa filing. To my knowledge there is no extension permitted. You either comply to US gov't or in violation.

Chris L. · Answer

Thank you for all so very much for your replies and for taking the time to provide info.

Jay Hinrichs · Answer

@Dave Foster  speaking of Starker  my favorite deals were 1031 timber deeds for multi family.

land owner gets to log with tax deferral the trees are on 60 to 70 year growing cycles... so now they own a multi that cash flows nicely.. they still own the land that I replanted  and the next generation will do it all over again.

I buy the timber log it make money.. we all win .. and if it is really good I get to broker the sale of the multi

now this is a little difficult for a lot of timber land owners to grasp as they are usually not versed in real estate and tax.. and many times they simply do not believe it can be done... because their local book keeping service person has never heard of it.    Plus I pay the timber harvest and severance tax... its a great deal all around

Dave Foster · Answer

Not to date him at all but @Jay Hinrichs would know.  He was around doing 1031s when they really were complicated.  The days of straw men, musical chairs and west Texas fill land. Since Starker v commissioner they're just a process to follow.  And an incredibly process at that.

Jay Hinrichs · Answer

@Dave Foster   same sentiment these are NOT complicated and they are common and one should not be freaked out by the OH my god its complicated crowd you need and attorney etc..

I have done many many of these with QM's and no attorney involved..

Just talk to your QM up front  get the rules of the road follow them. etc.

and yes some folks that are procrastinators can run into timing issues..

but if your doing this you should be scoping out what you want way before you even sell your property.. so you have a running start..

I have personally never done one but I have brokered or arranged the following

1. Timber deeds for clients that rolled into Multi family

2. Multi to multi

3. Multi to commercial

4. commercial to Multi

5. group of SFR rentals to MULTI

etc etc.. its simple go for it.

Has anyone used a 1031? Is it complicated?

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