All Forum Posts by: Kyle Smith

@Trent Chance if the IRS thinks you're doing the 1031 only to avoid the tax instead of for a separate business purpose, they could consider the refi as taxable. 

Here's the position according to First American Exchange Company: 

"Although it is possible to refinance before or after an exchange without triggering tax, investors should carefully consider their options before doing this, because the IRS could take the position that the refinancing is taxable when it is done to avoid tax rather than for a separate business purpose. Despite this risk, an investor should be able to refinance the relinquished or replacement properties and get tax free cash, as long as he establishes that the refinance had "independent economic substance."

Every situation is different, and investors should discuss their plans with their tax advisors, but here are a few suggestions that may help investors structure a refinance so that the funds received are not taxable:

The loan should have a clear business purpose (other than just getting the equity out of the property) and that business purpose should be well documented in the investor's files.
The refinance should occur as far away in time as possible from the closing of the relinquished or replacement properties.
The refinance should be documented as a separate transaction and should not appear on the same closing statement as the closing of the relinquished or replacement properties."

Important to remember that this is their recommendation, not their requirement. Proceed with caution is probably the most prudent advice, I guess 

 

@Trent Chance I recently completed a transaction similar to what you're describing. In April, I did a 1031 exchange and paid cash for the replacement property. My plan was to stabilize the property and then do a cash out refi after about 6mos to take advantage of the historically low interest rates we have right now and get my capital out. I went to clear it with my CPA but he said I should wait an entire year before doing it to prevent any red flags from the IRS. 

Not sure how that would impact your deal but it's something to consider. Good luck!

Is the idea to rent out the MH once purchased? If so, what amount of rent could you reasonably expect?

In sticking with that theme, I would say, it's only a failure IF it stops you. Otherwise it's an opportunity to learn, reflect and improve!

@Chris Kreidel you’re spot on about the proximity of Big Bear for people here in SoCal. Closer/more convenient than Mammoth and still has that small town feel.

We have looked extensively around the Lake and into Arrowhead as well and it IS hard to make the numbers work. But by leveraging tech and being creative (duel family setup you mentioned), you could be on to something. That combined with the lifestyle play you referenced also, could be really good. 3/4 coverage on expenses and the opportunity to enjoy the mountains yourself doesn’t seem like too bad of a deal! Good luck!

@Sharlene Burch it's not too late and if you will be in a better financial position next year to make the jump, then get yourself as educated as possible in the interim. Learn everything you can through BP, books, podcasts, REI groups etc so when the time comes, you'll feel more prepared. With that said, there's also no telling what the market will look like next week, next month or next year. It'll NEVER feel like the perfect time to jump so eventually, you just have to do it...!

I’ve been doing this since 2002 and still feel like I’m learning something new every day

No, you'd need the amount of the purchase price in your Net Worth, not cash reserves. 

@Logan Aardrup a decent rule of thumb for CapEx is 8-10% of monthly rent and 5% for Repairs and Maintenance. Lots of variables of course but that's a good place to start.

@Carson Smith this one you should definitely pass on. The numbers are already too thin to pursue and you've not underwritten it conservatively enough either. CapEx, R&M and PM fees are all probably low estimates on this deal.

@Jessica M. You’re right about there being more to vetting tenants than just a good credit score. That said, it’s hard sometimes to get an accurate impression of someone in a 15 minute walkthrough with them.

As others have said, deny non-essential requests while maintaining a professional relationship with the tenant and then don’t renew when the lease is up.