Happy New Year to All!
I have been rehabing a few homes and wanting to defer taxes as long as possible. I’ve heard of the 1031 exchange, but I have a few questions on it.
- What goes into a 1031? I have been using credit to fund most of my projects and need some of it out to pay off my debt. Can I pay off my debt and put the rest in the exchange?
- Do I have to put all of the profit into the exchange or can I pull some of it out and use the other as income (I know I will have to pay taxes on that part)?
- Who establishes this exchange (realtor, bank, myself)?
Any input on this would be greatly appreciated.
If I have it correctly…
1031s are only for rentals so you can do it for your rehabs but only if you are renting them out.
You can pull money out but not at the exchange time. You simply need to refinance and THEN do the exchange.
I would say you and the realtor set it up (but I have never done one)
Happy New Years!.. well, in 2 hours 21 minutes 
Oh, i was thinking that I could do an exchange to finance my next home without going to the bank and paying another $1,500 in closing costs.
The new year begins for us in less than 20 min.
Is the next home you are getting going to be your personal residence? Is the current home a rehab that you are renting?
I’m sure you will get some great answers from the people here that know more about the 1031s.
A 1031 exchange is a like kind exchange to defer capital gains. In order to qualify for one, you typically have to own the property for at least a year and a day so it doesn’t really work for people who are flipping as they sell in less than a year.
You have to roll the gain into the new property that’s similar, otherwise if you take out any of the gain, it’s called boot and you have to pay taxes on it.
In order to do it, it’s known as a three party exchange so you never actually touch the money. There’s companies out there that will do this for you, lawyer may also know someone, but it’s got to be a disinterested 3rd party.
As the 1031 involves profit, yes you could do something like sell a property for 150k that you paid 100k for and take that 50k and roll that into the next property. The other 100k you use to pay off the original loan at closing. The property you purchase has to be equal or greater in value. There’s also a bunch of other rules like identifying a replacement property within 45 days of the sale, but having 180 days to close on the property.
Doing a refi on the property before you exchange it could cause you to run into some penalties if you do it too soon. I also don’t think you can do the exchange without involving a new mortgage so you’re going to have closing costs. The 1031 exchange is merely a way to defer paying capital gains taxes. Everything else is the same.
Henry, got a quick question on this 1031 thing.
If I personally live in the home and sell my home to buy even or up, can I put my equity dollars in the bank or otherwise use the equity if I Sub2 the ‘even or up’ home?
Or…Do I totally have to get a new loan, put my total equity down?
Basically, I am asking if I obtain a Sub2 house will the 1031 still apply? Seems it would since I would have the deed.
I’d like to build some non taxable value (in the short term) by moving ‘even or up’ every two years and taking a new Sub2 property for my personal residence and selling the previous residence and banking the equity for a few RE projects. Then I can sell after I turn 55 and take the equity on paper tax free (only once) and downsize my residence without a heavy tax bill.
Is this doable under the 1031 program?
Thanks
The 1031 is for investment property. For personal residences, you don’t even need the 1031. As long as you’ve lived in the property for the last 2 out of five years, you can sell it and pay no taxes on gains up to 250k for single and 500k for married couples. As the money is then yours to do whatever you wish, either keep it in the bank or spend it however you like, no requirement to spend it in any way. Just money that’s free and clear.
You can keep doing this every two years, there’s no limit. The limit would probably happen when Congress decides to change the laws again, but no signs of that happening yet.
Hope that answers your question. Forget the 1031, use it only for rental property.
I was trying to figure out if there is a way to use the 1031 in rehabing properties not in primary residence.
I would like to keep reinvesting the profit into other rehabs and not have to tap into other financing? Is there a way to do this other than cashing the check and paying immediate taxes on it?