March 24, 2020 at 7:17 am
by Brit Vitalius, Principal, Designated Broker, Vitalius Real Estate Group
In 2019, we saw 1031 exchanges used even more frequently than in past years. Interestingly, the variations in the transactions illustrate a number of different ways the 1031 exchange can be used to accommodate different investment transitions. The following is an example of a domino of 1031 exchanges we strung together for clients recently.
3 unit to 3 unit – A divorced couple decided to sell the jointly-held 3 unit. The husband wanted to stay invested in property, so he took his portion of the sale proceeds and purchased another 3 unit.
3 unit to 6 unit – The seller of the second 3 unit wanted to expand his portfolio and was willing to sell his 3 unit in order to do so. In addition, we helped negotiate his sale contract with an extended closing date in order to give him more runway to find a replacement. We eventually located an off-market 6 unit which he purchased.
6 unit to a new project – The seller of that 6 unit is now looking for a project. He had renovated the 6 unit, and there wasn’t much left to do other than hold it. Being a more active investor, he is looking for opportunities to find either a) something larger or b) a project that could be renovated, converted, etc. Incidentally, this property had been the 1031 exchange years ago so this investor will be highly motivated to find a replacement as he is 2 or 3 transactions deep in deferrals.
Remember, a 1031 exchange is a powerful tool, but it is only a deferral of the taxes owed. Consult with an experienced real estate broker and a Qualified Intermediary (QI) before performing one. Make sure you set up the exchange with the QI BEFORE the sale of your property. Once the transaction closes, it is too late.