OT: 1031 Exchange

Do we have any experts on the board? Even better any qualified intermediaries? If not, I am sure there are enough real estate moguls on here to chime in.

Here is the scenario. Contracted to build a house last September (2020) and we locked in the price and paid a 5% deposit to the builder at that time. We made selections/upgrades in December and put another 3% or so deposit down based on the upgrades. The home is finally nearing completion and we have a close date of 10-21-21. Throughout the last year, the area we are building has become one of the hottest housing markets in the country. The day we close we will have approximately 50% equity in the house.

We were originally supposed to be in the house in June, but delays have pushed it back. Our lease ran out and we ended up buying an investment property a couple hours away from where the new construction is being built. We have been living in the investment property for a couple of months and have fallen in love with this town. Turns out it's the best school district in the state and the kids are thriving quickly. We are about 95% sure we are just going to stay here and figure out how to sell the new construction without getting our faces ripped off.

Here are my options.

1. We could sell the new construction immediately after closing, but we would have to pay short term capital gains (I think, or is it possible that because the original contract is over 1 year old at that time it would qualify for long term capital gains?) After state and federal taxes, we would be looking at a 44% tax hit on our profits... No thanks.

2. We could rent the house out for at least a year and then sell the home and pay long term capital gains tax on it when we sell (Currently that would be a 26% tax rate after state taxes.) Obviously a better option, but I also have a fear that in a year there could be no such thing as a short or long term cap gains tax, everything will just be taxed as ordinary income.

3. We could rent the house out for a short period of time 3-6 months and identify another property or properties to use all of the proceeds on in a 1031 exchange. Pay zero taxes for now and leverage that money a whole lot more... The tax man will always cometh, but we could effectively have double the portfolio by using the 1031.

Obviously option 3 makes the most sense. There are some definite mechanical hurdles as well, but for me right now the main question is:

If I use a 1031 exchange with short term cap gains and put it into something I hold long term, will I always have to pay short term cap gains rates? Or will it eventually kick over to long term gains after 1 year. For example.

If we have $100k in short term cap gains put into the 1031 exchange on January 1 2022. Buy a $500k investment property on Feb 1 2022. And sell the investment property on March 1 2023 for $600k. We would have $200K in cap gains. Is the whole amount long term, short term, or is it 50-50 because the original $100k will always be short term?


Sorry I know this is long and probably not interesting to most. But I have made several calls this week to CPA's and 1031 experts at title companies and not a single one has returned my call yet (Seems like it's not just a shortage of restaurant workers.) If there happens to be a 1031 professional on the board, I will be glad to reach out directly and pay for some services if that makes sense.

Gracias amigos.... Now back to bitching about football and academic rankings.

Comments

  • Having weighed all the arguments for and against, during the time I decided to invest in real estate, I decided to turn to exactly such a platform, which deals with the exchange. I exchanged my two-storey house with a huge area for a two-room apartment in the city center and decided to invest all the money saved in real estate. I bought two apartments in a new building and decided that this money should work. Specialists helped me with this, so I am almost completely confident in the success of this financial maneuver. Wish me luck!
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