All Forum Posts by: Dave Foster

@Ajay Bodas, Be careful!.  There's actually some deeper nuance here than just the holding period.  @Jared Smith it depends is pretty spot on!!!  

Like @Ashish Acharya, said there is no holding period and if you're transferring into a disregarded LLC holding period isn't relevant. Because you are not changing the tax return that reports the activity of the property.

But... the IRS holds the position that Husband/wife LLCs can only be disregarded in community property states. In non-community property states a husband/wife LLC is supposed to be treated as a partnership And transferring from a revocable trust (reported on your 1031) to a partnership LLC (that files it's own tax return) is changing the tax payer. And this might indeed require some time to pass before doing that.

You could still create a single member LLC with either you or your wife as member. And this LLC could be disregarded. It will still be reported on your personal tax return.

@Mark Lee, I appreciate that shout out from @Jake Andronico.  location of your QI really isn't a factor.  Most 1031s will start in one location and end in another anyway.  So overall experience of your QI to work in a number of markets and locations is really the key.  As well as accessibility to them for you to strategize and get answers to questions.

There are several QIs like us right here on BP.  The BP function allowing you to check references and actually talk to real clients of those QIs is a great advantage.

@Jade Frank 

I agree with what @Dominic Mazzarella and others are saying here, but If you find the downside outweighs the gain and you ultimately decide to sell the property, Since the property was held for investment use it would qualify for a 1031 exchange. 

This would allow you to indefinitely defer all of the tax if you sold, and use the tax you would have had to pay, to purchase something nicer in an area with a greater growth potential. 

@Micah Cook It's not uncommon for investors to scale up their holdings by consolidating their portfolio. They can do this as 1031 exchange, which is also known as a consolidation exchange. This allows you to use all of the tax and deferred depreciation recapture to purchase the larger MF property

A consolidation exchange is where you sell multiple investment properties to purchase a larger and nicer investment property, but you also get the benefit of using all of the tax you would have had to pay to your advantage.

Each of your sales will need to have overlapping time frames (45 days to identify and 180 to close). And in order to defer all tax you must purchase at least as much as the aggregate net sales price of your properties.

These all can seem daunting but in my experience exchanges are more successful than not. And the more proactive you are the smoother.

@Robert Pickett, @Bill B. is right.  First you need to find out what your gain is so you know if you need a 1031 exchange. Gain is your net sales price minus your adjusted cost basis (purchase price plus capital improvements minus depreciation).  At CA tax rates it doesn't take much to be a significant number!  

If so then a 1031 exchange would be in order.  And there you are in luck because you can purchase any type of investment property anywhere in the country and defer all tax as long as you purchase at least as much as your net sale. and use all of your proceeds from the sale in the purchase.  You can allocate those proceeds any way you want - as equal down payments or buy one for cash and others with loans - It doesn't matter a bit as long as you use all of the cash and purchase at least as much as you sell. 

@Kathy Grossart, You did not do a 1031 exchange.  All of your profit stayed inside the SDIRA and remained tax deferred there.  Hopefully your accountant did not file an 8824 reporting the 1031 exchange.  End result here is that whether or not the new property was eligible for a 1031 exchange you were investing inside a qualified retirement account.  So your profit should be tax deferred anyway.

It should be the same thing for your exit - no need to do a 1031.  Nothing to 1031 from.

@Christina Galdieri You can absolutely 1031 exchange into multiple replacement properties. The key is not the number of properties. To defer all tax you must purchase in total at least as much as your net sale.

This is what is known as a diversification exchange, and can be great for the investor who wants to diversify their portfolio. A common strategy I see with diversification exchanges, is that the investor will purchase the first property cash and the second with a mortgage.

This will allow you to mitigate risk on the first property but also allow you to do a cash out refi on the second, so now you have access to tax free cash that you can do with whatever you please.

There are a number of QIs right here on Bigger Pockets. The unique thing about this platform is that you can actually search reviews from BP members and interact with them about their experience with that particular QI. Many times your realtor may have a relationship with a QI. This can be good because your realtor will be using them as a resource to help you plan your 1031. It's really all about putting together your team - realtor,  title company, other adivisors, QI. You want them all to be able to communicate well with you and with each other.

@Duke Butterfield You're asking great questions. To really make a good informed decision you'll want to look at all of the metrics of your properties performance. This means a deep dive into your Internal Rate of Return ((IRR). This is the sum of all of the sources of gain including not only cash flow and appreciation but also depreciation and amortization of the loan. A property that may not have great cash flow could still be a great performer because of the appreciation factor. Or maybe the loan is advantageous. So that the tenant rent is providing a larger amount of return of capital. These are going to show you the true performance. Then you can determine whether or not to hang on to that one or seek something somewhere else.

Even the decision to move into other asset classes like equities or whatever will need you to factor in the loss of investing capital in the form of capital gains tax (plus 5 years of depreciation recapture).  In order for you to make a good decision to stay in real estate and do a 1031 if selling that AZ property is warranted.

And at the end of the day there is the crystal ball factor :)

@Dylan Gomez, Spot on by @Carini Rochester.  Your first determination is what your tax exposure is.  You should only be liable for tax on any appreciation since you inherited the rental (minus the cost of your improvements).  So there might not be enough gain to need a 1031 exchange.

If there is enough gain to justify the 1031 exchange then simply treat your replacement property as you would any other investment like @Daniel Osman said.  Only in this house your mom happens to be the tenant.  Charge market rent.  Declare market rent on your taxes.  And to really take care of your mom use your annual gift limits to gift back to her the rent she pays.  So living there ends up costing her nothing.  But you are absolutely demonstrating your intent to hold for productive investment use.

@Dallas Smith, With some good running of the numbers by your accountant this can work.  You're dealing with two parts of the IRS code.

1. Your primary residence - if you've lived in it for 2 out of the 5 years prior to selling you'll get the $250K/$500K tax free iike @Clint Galliano said.  This is tax free.  You don't have to do anything with the money and there's no time limits or anything.

2. Your investment property - This you could do a 1031 exchange on and buy another property you intend to use for investment.  Doing this will indefinitely defer paying tax on profit or depreciation recapture.  But you have to purchase new investment property of at least as much as your net sale to avoid tax.  You can't buy your new primary residence with it.

But, here's where you could make it all work.

1. Sell your primary and take the money tax free.

3. Sell your investment property and buy the land for your business.  As long as the business portion of the land is at least equal to the amount of your sale  that would satisfy your exchange.  You could use the rest of the land to build your primary residence.

or... Start a reverse 1031 exchange.  The QI for the 1031 buys the land and holds it while you start construction on it.  You could use the sale of your primary and the sale of your investment property to fund the purchase of the land and the beginning of construction.  Once the construction of the business building was far enough along (but no more than 180 days) that the price of the land and the amount of improvements you make on it are equal to the sale of your old investment property you take title to it and that would complete your 1031 exchange.  You could then complete the construction and build your primary where you want on the land.

It's a bit of a complicated process.  But could be a great deal for you in the right circumstances.