Use a San Jose 1031 Exchange to Upgrade Your Income Property Portfolio

By
Real Estate Agent with The Papas Group (DRE #01766524)

Use a San Jose 1031 Exchange to Upgrade Your Income Property Portfolio

An IRS Section 1031 Exchange allows investors to sell business or rental property and purchase a “like kind” property and not pay taxes on the capital gains from the sale provided one follows certain rules and regulations required by the IRS.

Briefly the requirements are:

  1. All of the net proceeds from the sale of the relinquished property goes towards the purchase price of the replacement property in order to defer taxes.
  2. The net proceeds of the sale must be deposited with a QI (qualified intermediary) that holds these funds in trust until a new purchase property can be located and specifically identified.
  3. The net purchase price of the new property must be equal to or greater than the net sales price of the property just sold.
  4. 45 day timeline: the parties have 45 days as of the close of escrow of the relinquished property to find and identify a replacement property to purchase.  You then have 180 days in which to close escrow on the replacement property.
  5. This process can be repeated to upgrade investment properties over the years, and defer paying capital gains taxes in this manner.


This is an excellent tool that can be used by those who have invested in single family homes or condominiums and who would like to upgrade to a multifamily property such as a triplex, fourplex, or larger apartment building.

For example, a 3 bedroom single family home rental property in San Jose with $700K in equity could be exchanged for a fourplex priced at $800K with the addition of a $100K short term note at time of purchase. A short term note can increase your purchasing power for the next investement.

The benefits of the 1031 tax deferred exchange are:

  • defer capital gains taxes on sale of the relinquished property
  • increased NET income due to more rental units
  • new schedule for depreciation write-offs
  • short term note can be paid quickly putting more cash in hand after debt liquidation
  • proceeds of sale from the relinquished property can be invested anywhere in the US allowing higher flexibility in identification of a new property
  • lower impact on monthly cash flow due to vacancies


You are welcome to contact us for a 1031 exchange consultation if you are considering upgrading your rental property portfolio. We represent 1031 exchanges within California as well as represent either sale or  purchase into or out of California.

With all the short sales and foreclosures today, the income property market appears to be healthy.

Comments (4)

Dan Edward Phillips
Dan Edward Phillips - Eureka, CA
Realtor and Broker/Owner

Good Morning Paul great input on 1031 exchanges for the investor.

Feb 28, 2011 09:14 PM
Paul Caloca
The Papas Group (DRE #01766524) - Scotts Valley, CA

Thank you Dan, I very much appreciate your independent broker's perspecitve. ;-)

Mar 01, 2011 04:52 AM
CA COASTAL ESTATES Lauren Selinsky Perez CRS
California Coastal Estates - Aliso Viejo, CA
"Your Real Estate Broker" #oclauren

Los Gatos! Love saying that.... Speaking of LOS GATOS~ a must place for me to dive in MEX~

What is the median price in YOUR Los Gatos?

Mar 09, 2011 09:22 AM
Paul Caloca
The Papas Group (DRE #01766524) - Scotts Valley, CA

Lauren, for February 2011 the Los Gatos Median Asking Price was $1,298,500 and our Median Sold Price was $1,020,000. We're a bit more expensive than MX and the weather is not as warm. We're in the foothills overlooking Silicon Valley.

The nearest notable diving spot is Monterey, CA about 45 minutes south of us. Watch out for Great Whites as they love to nibble the toes of surfers and abalone divers  ;-)

 

Mar 10, 2011 06:13 AM