Should you Evict and Remodel before doing a 1031 Exchange?
So you have a rental property that you have owned for some time and is ready for a 1031 Exchange. Of course you have rented it out and it has/had tenants in it. You have kept the house livable but have not done any major upgrades and avoided repairs. And let's face it the tenants have not told you about problems that have been developing.
What do you do? Do you sell it as is or do you upgrade the property (like a flip) and sell it? Right off the bat to really get it in a top notch showing condition you would need to get the tenants out, not just for the fix up, but while it is on the market. So you are loosing money on rents. So part of the decision is taking a hard look at the market to determine how much the fix will increase the price and shorten the time on the market. Does the time saved on the market and increased price pay for the lost rents. Just having the property vacant may help it sell faster.
Some people (other investors) like to buy properties that are occupied. But most want to buy an empty property. Occupied properties, especially with tenants, are often harder to show and do not get the showings they should for this reason. It is just a turn off. Before making a decision strongly consider how cooperative your tenant will be with showings. Will missed showings cost you offers and time. Time is money and the more offers you can get the better your price will be.
The last issue is a tax issue, and I am not a tax expert, so I do recommend consulting with the 1031 exchange company and an accountant first. It comes down to paying for the repairs. If you pay cash up front for the repairs; depending on the nature of the repairs you can write them off that year or depreciate them over the appropriate period. But when you sell you will not be able to pull the cash you just put in back out of the transaction without paying capital gains tax on the amount.
I think the way to get around this would be to borrow the money for repairs and upgrades against the property itself. So when the home sells the lien is paid and you do not get hit with the capital gains tax. But it cost money to borrow money and the amount need for repairs might not be so much as to justify the cost of the loan.
The Real Estate Market is a target moving in 3 Dimensions at all times. It is moving in location, time, and goals and objectives of the client. A careful look at all 3 is needed before deciding how to proceed.
Gene Riemenschneider is the author of The Free Book of Real Estate Investing and is the Owner/Broker of Home Point Real Estate in Brentwood CA; serving the East Contra Costa County Communities of Brentwood, Oakley, Antioch, Discovery Bay, Pittsburg and beyond.