What to do with extra 1031 money ???

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Question  I will have about 22k left over from my 1031 that I will either receive back and pay 15% taxes on. I owned the previous house for more than 1 year so that's why capital gains tax is that much in Ohio according to my accountant.  or should I pay apply it to the principal mortgage and have further equity I can borrow against. The house appraised for 315k and I bought it for 270k so already have 45k in equity.

I will pay$3300 in taxes but will have freedom to either renovate other properties, use as down payment or whatever. On other hand if I use it to pay down principal I will have further equity but I figured if I cash out refinance to use on another house I will pay at least couple thousand in closing costs, title, origination fee, etc. I know the conventional is apply as much as I can towards principal so I pay no taxes on my 1031 money, but my question is is worth to spend extra 1k or so to have freedom to do whatever. If I apply it to principal its locked in and I will have to refinance to access it, but I know its nice to have extra 20k to do whatever with and don't need to ask anyone else for it. Thanks!

Bill Exeter · Answer

Hi Chris,

Yes, you can allocate or split your 1031 Exchange funds between two or more replacement properties.  You can sell one or more relinquished properties and you can buy one or more replacement properties.  There are really no limits as to the number that you can sell or buy, but the more properties involved the more complicated the 1031 Exchange becomes.

You can also use the extra $20,000 toward capital improvements on your Replacement Properties.  There are a couple of ways that it can be accomplished.  Generally, if the $20,000 must be spent and the improvements made after you close on your purchase then you must structure an Improvement Exchange.  The costs associated with an Improvement Exchange would be cost prohibitive for $20,000 in improvements.  You could ask the seller to make the improvements before closing and then raise the purchase price to accomplish the same thing, but there are risks to both sides in doing this.

David Fritch · Answer

I would take the tax hit and use the cash  for the next great deal. Liquid capital has great power. Imho people worry too much about tax benefits and saving money on interest and end up in a situation, whether an opportunity or problem,  where they need cash.

Lane Kawaoka · Answer

If you are a fan of optimal leverage I would not pay down mortgages... that would lower your return on equity.

Look at making the seller or your replacement properties make improvements and increase the purchase price by that amount but make sure it makes sense from an ROI prospective and your property needs to appraise for the higher price if your trying to get a loan. Does anyone know if you can increase the prepaids?

If you have exhausted all options I would just pay the taxes on the boot and just be grateful that you were able to able to tax defer the lions share.

Richard Zahm · Answer

We're providing the opportunities that Bill describes: Direct investment interests in residential real estate using a Land Trust-based structure. We've got smaller investment positions available for investors who either want to diversify across multiple properties, or who lack sufficient 1031 funds to acquire larger properties or nearby properties in more expensive areas ex California coast. Consider liquidity, as well. It's good to be able to get OUT of investments when new opportunities arise.

Bill Exeter · Answer

Purchasing Tenant-In-Common interests, Delaware Statutory Trust beneficiary interests, Land Trust beneficiary interests and other "disregarded entities" qualify for 1031 Exchange treatment, but Section 1031 of the Internal Revenue Code specifically excludes any kind of partnership interests for 1031 Exchange treatment.  Partnership interests, whether they are general partnership interests or limited partnership interests, do not qualify for 1031 Exchange treatment.  There are some creative ways that may allow you to "end" up in a partnership and may qualify for 1031 Exchange treatment, but buying directly into a partnership will  not work.

J Scott Hamilton · Answer

Since this is posted in "Innovative Strategies", consider the following. Years ago when I was in tax practice, it was determined that investing in a real estate limited partnership was considered "like kind" for purposes of a 1031 exchange.  You might see if there are any such interests on the secondary market that you could identify and buy.

Eric S. · Answer

As far as I know you can. I identified 3 properties but was only closing on one as I knew I wouldn't have enough money to close on multiple. I suggest choose multiple and if doesn't work it doesn't at least you have the option.

Chris Sones · Answer

I was wondering if you can if you can take the full amount from the sold property and split it between 2 new properties with a 1031? Could you use the extra 20k for improvements to avoid taxation? I'm new with the real estate investing and have very little knowledge of a 1031. Please excuse my incompetence.

Timothy Murphy III · Answer

@Eric S.

I haven't looked into this kind of thing in detail recently, so be sure to fact check it...

But my recollection is that debt relief in a 1031 exchange is considered "boot" and subject to taxation. Assuming that's correct, using the remaining proceeds to pay down principle won't help you defer taxes on said proceeds.

What to do with extra 1031 money ???

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