Anyone done a 1031 exchange?

[Carpediem]

Has anyone completed a 1031 exchange for an investment property? If so, did you go up or down in value? Looking for feedback, gotchas, and anything else I can learn from.

We are selling our beach rental condo and buying a condo closer to the grandkids. We're thinking of renting the new condo for a couple years as part of a 1031 exchange. Unfortunately it would be a move down in value so there would still be some cap gains to pay.

 

[skyking1]

Not yet, but I have one planned so I will follow along.

 

[gauss]

I have an inherited condo that I rented out for a bit to a tenant who was somewhat less than arms length away. It went fairly smoothly, but if I were to move forward I would like to try to use a property management firm instead.

It seems like being in a 1) condo with HOA 2) having multiple city inspections required 3) invoking a property managment firm would be too many interacting entities for things to go smoothly.

As such I am interested in perhaps selling the condo and possibly getting a SFR instead. As such I will follow the conversation also.

At the end of the day, however, having much larger "income" from financial investments available in recent months takes much of the luster away from R.E investing for income.

-gauss

 

[Spock]

Last one I was involved in was in late 2016.
In today's local market I don't see how to complete another one as it would be impossible to find a suitable replacement property in the time allowed between the sale of X and the purchase of Y.

 

[Letj]

I have attempted to do 4 but only successfully did one in 2021. I couldn’t find a suitable replacement property for 3 and the 4th I went down more than $150K in price and had to pay a significant capital gains (the IRS really gets you if it’s not an even or greater exchange). If there’s any leverage on the property, you must take on at least the amount of leverage or bring cash to the table. For the ones where I couldn’t find suitable exchanges, I invested in Opportunity Zones.

 

[Carpediem]

For the ones where I couldn’t find suitable exchanges, I invested in Opportunity Zones.

Wow, I had not heard of OZs. Now my head is swimming! ;-)

Do you know if you can do both a 1031 exchange and invest the "boot" in an OZ instead of paying CG taxes?

 

[JDARNELL]

Yes I have done two in the last 3 years. Very stressful with the timelines.

 

[Letj]

Wow, I had not heard of OZs. Now my head is swimming! ;-)



Do you know if you can do both a 1031 exchange and invest the "boot" in an OZ instead of paying CG taxes?

No. OZs work differently. You invest the capital gains only and defer the taxes until 2028 and if you hold investment for 10 years, gains from the new project not taxable. I invested in apartment buildings and get about 60% of the original investment returned at the completion and refinance of project. It’s more than enough to pay the taxes originally deferred.

 

[skyking1]

Hopefully mine will be pretty straightforward.
It's unimproved vacation property and I will look for something similar but closer.
It isn't that much capital gain probably 50k but it's the principle of the thing.

 

[captain3d]

Yes. Went from 800k to 600k. Boot 200k. Pretty smooth. Not too much complexity on top of normal buy/sell.

This was a year ago with mortgages enclosed. Would do it again. Worst case is normal sale and taxes.

 

[Carpediem]

Yes. Went from 800k to 600k. Boot 200k. Pretty smooth. Not too much complexity on top of normal buy/sell.

This was a year ago with mortgages enclosed. Would do it again. Worst case is normal sale and taxes.

So you paid CG tax on the 200k boot, right?

 

[Retired Expat]

Yes, converted my share of a rental property I owned with my sisters into 3 rental apartments using 1031. It was great! Still had to pay some Cap Gains but was so worth it!

 

[Carpediem]

I'm a bit confused about boot compared to mortgage boot.

Let's say I bought condo #1 (original property) for $100k and decide to sell it for $350k. It has a mortgage of $50k, which I pay off using the proceeds (boot).

I want to buy condo #2 (replacement property) for $150k with no mortgage.

Is my total boot that I'd pay tax on $300k ($250k appreciation + $50k mortgage boot)?

 

[Scuba]

I don’t know the answer to your question. We considered doing a 1031 exchange because we are selling one of our CA properties and considering buying a property in FL. We decided against it although I think it’s a great opportunity financially. Our concern was all the restrictions and rules associated with it. We would have considered it more seriously if we had a large gain to shelter, but we didn’t so we decided to just pay the CG tax and have more flexibility.

 

[Letj]

I'm a bit confused about boot compared to mortgage boot.



Let's say I bought condo #1 (original property) for $100k and decide to sell it for $350k. It has a mortgage of $50k, which I pay off using the proceeds (boot).



I want to buy condo #2 (replacement property) for $150k with no mortgage.



Is my total boot that I'd pay tax on $300k ($250k appreciation + $50k mortgage boot)?

Your must 1031 the entire $350K (assuming this number is selling price less selling expense) to avoid the tax altogether. If you paid of $50K in mortgage you must take on $50K in mortgage debt or bring cash to the table. If the replacement property is $150K, your boot is $200K. You will follow the IRS rules to determine the taxes on the boot and you’ll need to add back depreciation (whether you took it or not) to calculate taxable gain. I had this scenario a couple years ago and was surprised how much taxes I still had to pay. The boot will also affect the basis for the replacement property.

 

[captain3d]

So you paid CG tax on the 200k boot, right?

Yes although I managed to find a lot of losses to offset the gain that year

 

[tryan]

Last one I did was 2004 ... inner-city duplex for lake front land in a resort area. Was only able to exchange about 1/2 the sale value so had a capitol gain hit too.

 

[Scrapr]

Somewhere around 2008 or a bit before I exchanged a rental SFR for a duplex (different cities). No issues doing the exchange. But there was one very close call. This was when construction and mortgages were booming. Since the seller can not take possesion of the money there are companies that do it. We had no problems doing ours that way. But about 6 months later the exchange company went bust. Seems they were investing all the free cash flow in more land/developments/construction. All not allowed. But hard to catch in a rising market