In terms of selling a rental property that I’ve held for 10 years, I’d appreciate any guidance on how to transfer the net proceeds to another rental that needs major improvements (also held for as long). Has anyone tried construction 1031 exchanges? what about structured sales? what are the pros and cons in either case?
Many thanks for sharing your lessons learned.
1031 Exchange…
It sounds like you are saying two things I have issue with… 'In terms of selling a rental property that I’ve held for 10 years, I’d appreciate any guidance on how to transfer the net proceeds to another rental that needs major improvements (also held for as long). Has anyone tried construction 1031 exchanges?'
First, held for as long… A 1031 exchange is selling one property (using a qualified exchange intermediary, which most title companies can steer you to, and must be done before selling or buying) and moving the funds into a new purchase. You can’t move them into another property you already own.
Second, construction 1031 exchanges. Never heard of it. The exchange is designating a property you are selling as a 1031 exchange property, using a qualified intermediary, designating then buying another like kind property you do not currently own (best the purchase is for higher price than the sale, but can be done otherwise with ‘boot’), and the intermediary takes the money from the sale and moves it into the purchase without you ever touching it. Rather than pay taxes on profit from the sale, your basis in the sold property is transferred into the new property (thereby reducing your basis in the new property).
I am definitely not an expert on 1031’s - I have done a couple… However, as mentioned, you should be able to call most any title company, and have them refer you to a qualified intermediary, and they should be able to walk you through it. That is how I did both of mine, and between the title company and the intermediary, they made it very painless.
Best wishes,
Chris in FL
Stats,
As Chris already told you, 1031 exchange can not be used when the replacement property is property you already own. A construction exchange is a variety of 1031 exchange where the replacement property is under construction or to be constructed. This exchange can also be used for a replacement property that needs significant renovation and you want to fund the renovation from exchange proceeds.
The exchange timeline is still 180 days, and your QI has to take assignment of your purchase contract, order the renovation in his name, pay for the renovation from exchange proceeds, then transfer title to you to close the exchange. Costs for a construction exchange tend to be much higher than a traditional forward exchange.
beyond directing him to a qualified 1031 exchange intermediary we should stay away from this one.
Selling a rental property and reinvesting the proceeds into another can be a smart move. Personally, I find 1031 exchanges quite beneficial for deferring capital gains taxes. A construction 1031 exchange allows you to sell one property and use the proceeds to improve another, which can increase its value significantly. However, it requires strict adherence to IRS rules and timelines, which can be complex.
On the other hand, structured sales offer a way to spread out capital gains taxes over several years by receiving the sale proceeds in installments. This can provide steady income and potentially lower your tax bracket, but it means waiting longer to receive all your money.
In my opinion, if you’re comfortable navigating the complexities and strict timelines, a construction 1031 exchange could be more advantageous for significant property improvements. However, if you prefer a simpler, more flexible approach, a structured sale might be the way to go. Consulting with a tax professional is crucial in either case.