1031 Tax Exchange

[Jim]

Do we have any Accountants of the forum?

I own some residential rentals. Recently I had to evict a tenant from one of my nicer homes, and the property damage is significant. I'm in an area where finding qualified people to rent a home for $1,000 a month is tough. I can find plenty that want to live there, but they're not the kind of people that will take care of the place. And finding qualified people who can afford to make the lease payments is difficult, as they're more likely to buy a home instead.

So we've decided to put this home back together and sell it instead of re-renting it. I own this house outright, and it will easily sell for $220K. I sell enough of my own property that I won't need to use a realtor and I've got a great relationship with a closing attorney. So after closing, I'll have pretty close to $215K to reinvest.

I also have 50 acres of land with several nice building sites. I'd like to take the $215K I make on the sale of the one rental property and use it to build 2 smaller short-term rentals. Is this allowed under the rules of the 1031 tax exchange?

TIA,

Jim

 

[Akdare]

Retired financial advisor; I know that 1031 exchanges have some very specific requirements; you can’t take possession of the funds from the sale of the first property, it has to be held by a qualified intermediary to be transferred to the seller of the second property, and it has to be done within 180 days. I would definitely seek the advice of a qualified tax professional in your state as there may be state tax implications also. My gut tells me “no“ on this as you are both buyer and seller, but a clever tax person may have a way around this.

 

[redbaron]

I have researched this for similar reasons.

I am not an attorney, but rather an invester like you are . I have an accounting background, but have used professionals for my 1031.

All that to say, take this as information that you need to discuss with your planner.

My situation was one where the property being sold was owned by one of my LLC's and the property I intended to invest in was owned by a different LLC. This created challenges to the process which are irrelevant, but I mention because ownership of sold and aquired property typically are required to be the same.

The next test is purpose. If your stated use is rental income and rental housing, then doing what you suggest is a like kind exchange. That test passes.

Another test is time. You may have a hard time meeting the time requirements, but I was able to overcome this by spending the money in the required time. For my purpose I was reinvesting 25% of the overall project cost. It was easy for me to spend the money in the time. Again, talk to your advisor on how creative you can be with spending this. I had to be "very creative" with ownership, so I have little doubt that being creative in the spend would be difficult.

There are other details, but those are the big ones.

Good luck!

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