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March 24, 2020 at 7:17 am

Vital Ideas – The 1031 Dominoes

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.

Categories: Maine Real Estate Insider, MEREDA News