f your problem is listed
below, a 1031 exchange may 1. If you exchange your current
or may not be your property for another of equal or
solution. greater value you still are faced
with the same landlord/tenant
1. Are you a landlord that problems that you currently have.
doesn't want to manage property Sure, you could hire a property
anymore? manager, but why is it that you
2. Do you want to sell your currently don't have one?
investment property, but don't
want to pay huge amounts of 2. A 1031 property exchange into
Capital Gains Tax? a like-kind property does defer
3. Is your current income the payment of Capital Gains tax
property not producing enough if you carry over all your equity
income? and at least the same amount of
4. Do you have a low adjusted debt. However, since your new
basis and not much debt on your property costs you at least as
rental? much as you sold the last for,
5. Is your credit rating less your property taxes will most
than perfect? likely increase. The cost of your
new investment has probably just
If you answered yes to any of the gone up.
above 5 questions, a traditional
1031 property exchange into 3. If your positive cash flow is
another like-kind property might currently nothing to write home
just put you right back to square about, your new property will
one! have to justify higher rents, be
located in an area with lower
Let's address each of the 5 property tax, or have fewer
problems one at a time. maintenance costs. Otherwise, the
chances of additional passive sometimes never closed at all.
income are very slim.
Considering your dilemma and
4. Your adjusted basis will carry possible pros and cons, will a
over as is to the new property, 1031 property exchange put you
so you will receive the same farther ahead, further behind, or
depreciation benefits as on the at best put you right back in the
prior property, unless you pay same boat you are in now?
more for your exchanged property.
Most likely a wash. If the answer to the last
question was not "farther ahead",
5. A poor credit score may result let me suggest that you look into
in a higher interest rate or a 1031 exchange that has a
poorer terms on your new slightly different twist.
mortgage, assuming you don't own
your current property free and It's called a 1031 exchange into
clear. Again, this translates a tenant in common property. This
into higher ownership costs. You might just put you in the
will also pay two sets of closing "farther ahead" category and
costs in the transaction. solve many of your problems.
Instead of exchanging into
One more thing to consider is the another solely owned investment
time it may take to sell your property, you will get a
current property, find a fractional proportionate share of
replacement property and secure an A grade commercial property.
all funding. This must be done You will have a deeded interest
within the 1031 specific time equal to your share of ownership
frames. Think of the times that (your exchange amount).
escrows have fallen through and
loans have dragged on forever and If done properly:
1. You will no longer be 5. The debt you acquire with the
responsible for the property TIC (assuming your debt/equity
management ratio is within the accepted
guidelines does not require you
2. All capital gains will be to obtain a mortgage or pay it
deferred. down. This is called non-recourse
debt. Your credit score does not
3. You can get a contractual become a factor, and the closing
monthly income from the equity can be done in a matter of days,
transferred (usually 6-7%) not weeks or months.
4. Your carryover basis is the Now, ask your self again. Would a
same, but you can acquire extra 1031 exchange into a tenant in
non- recourse debt without common solve your problems? If
qualifying and receive a higher the answer is "yes", what are you
interest deduction on your waiting for?
monthly income, thus making it
less taxable.
About the Author:
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