1031 exchange - Posted by Mark

Posted by Mark on March 26, 2001 at 20:14:50:

How funny!

Where is Raeford?

Do you know any good 1031 exchange attorney’s in NC, or near Charlotte? I can turn you on to an excellent mortgage broker that I know in Manhattan Beach. She used to work for an escrow co (another excellent firm - - Metropolitan Escrow in Torrance). She is very connected if you need help. Any lessons learned on the 1031 process???

1031 exchange - Posted by Mark

Posted by Mark on March 25, 2001 at 23:08:17:

I own a single family rental house in Redondo Beach CA, worth roughly $320k. It nets me about $500 per year. There is an incredible shortage of “entry homes” in this market, and the area has seen steady 7-10% appreciation in the last three years. I have about $125k in equity. I live in NC, and am debating about investing in RE closer to home. The problem (and benefit) is the 1031 exchange. As I understand it, I have to hold on the new property for a year. I wanted to buy some houses and flip them (after fix ups). This seems impossible with this 1 year hold rule. Any suggestions??? I’d love to get my hands on that equity, but what should I do???

Re: 1031 exchange - Posted by ray@lcorn

Posted by ray@lcorn on March 27, 2001 at 11:15:57:


I tried to answer your email but am getting an error message when I try to send. Perhaps something is up with your ISP?

(response to email of 3/27)

You’re confusing me… I thought this was a rental property? Not sure about using a home equity line on non-owner occupied property. Guess it could be done with the right lender, just not personally familiar with it. If this is your home, the previous discussion about a 1031 no longer applies.

But if it is rental real estate, then the deduction would be on the Schedule E of your tax return (assuming you own this in your name) as interest expense deducted from rental income, not under itemized deductions as mortgage interest expense for your home on Schedule A.

Please be advised that in addition to not being an attorney, I’m not a CPA either… and your mileage may vary!


Re: 1031 exchange - Posted by BobbyD

Posted by BobbyD on March 26, 2001 at 18:42:30:

Wow! We sure did it differently. I work about a mile or two from Redondo Beach and I own 2 SFRs in Raeford,NC. I’m in the process on an exchange myself. In fact, my 2nd rental in Raeford is the replacement property for the one I’m selling here in No. Hollywood. Good luck.

Re: 1031 exchange - Posted by ray@lcorn

Posted by ray@lcorn on March 26, 2001 at 10:12:26:


Sue is correct in her analysis of your situation. You can’t exchange for property you intend to flip.
However you can get to a good portion of the equity without incurring tax liability.

One strategy for getting your hands on the equity may be to do a cash out refi of your existing property, then exchange for another investment property closer to home. This would accomplish three things… cash now to use for your flips, acquire another long term asset, and defer the tax.

If I interpreted your numbers correctly, 80% financing on your present property would give you about $60T (less closing costs) to play with for flips. You would then seek a replacement property with at least $256T in debt and $69T in equity. That should put you squarely in the market for say a small NC apartment building, maybe ten to twelve units. But it can be any type of investment property, not necessarily apartments.

Assuming profitable activity from your flips, using the $60T for seed money, and the acquisition of a producing asset in the 1031, you could easily pyramid your original investment very nicely into two or three times the existing equity in a relatively short period of time.

One note: Remember that you must trade equal or up in debt and equity for a valid 1031, so keep that in mind as you search for the replacement property.


Re: 1031 exchange - Posted by SueC

Posted by SueC on March 26, 2001 at 08:44:44:

Mark, the property has to be held for investment. There is no technical 1 year rule or time period. That is recommended, because for a shorter time than that the IRS could possibly say it was not held for investment. But there is no hard and fast rule or law that requires it.

Worse for you, though, if you were to exchange for other “flips” instead of investment property, you could not use 1031, since you have to exchange for “like kind” property, i.e., other props you would hold for investment. In addition, if your activity is primarily rehabs and flips, not held for passive income and investment, you are acting as a “dealer”, and dealers are not able to use 1031 exchange.

Talk to an exchange agent near where you live, you can find a listing at http://www.1031.org. Or your tax accountant might be able to shed some light too about dealer status etc.