Question:
“Hi Gary! We just sold our apartment building in L.A. It’s in escrow for $900,000 and we’re debating doing a 1031 exchange and buying a property here in San Diego to fix up and flip. Do you think it’s a good time right now? We’re going to net about $600,000.”
Answer:
A few things…
- Doing a 1031 tax-deferred exchange with all your proceeds only defers part of your taxes. You have to buy a property for close to the 900K sales price of your old property to defer all your taxes.
- There’s stiff competition for fix and flip properties right now. There are very efficient investor groups who can outbid most people because they’re able to fix and turn properties quickly and pay much less for the work than you or I can.
- You can only exchange into a property that you intend to hold for investment. So you may not exchange into a property that you intend to fix and flip in the short term.
To answer your actual question (“Is it a good time?”), I would say the timing is not great, probably a 4 on a 10 scale.
As always, remember that I’m not a tax advisor and this is my opinion solely as a real estate broker. So please seek the counsel of a qualified tax professional.
