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Accepting Unsolicited Offers and Minimizing Tax Hit | Real Estate

It’s an investor’s dream situation. You buy a distressed property and begin on the mountain of repairs and renovations. Then, another person sees and desires—no, wants—your property.

Enamored by your actual property, they suggest to pay you greater than you paid. Before the sweat fairness even begins to type in your forehead, you obtain an unsolicited supply at a good-looking revenue.

Profit with out ache—what might be higher? Well, revenue with out ache and no tax hit whereas unexpectedly shifting on to the subsequent funding property can be finest case situation.

Getting an Unsolicited Offer

This is strictly what occurred to BiggerPockets member Jay. He is a rehab maintain investor on a quick observe to quitting his day job.

He bought a rental property and was within the very preliminary phases of its rehab. Then, lower than a month after closing, one other investor noticed his sensible play and supplied him a good-looking revenue.

Despite his behavior of shopping for and holding, on the time he acquired the supply, Jay had discovered of a six-plex that will be the proper addition to his portfolio. But he didn’t have the capital to carry and renovate the preliminary property and get the six-plex, as nicely.

Then got here the unsolicited supply. Jay accepted the supply and started to work the numbers for the six-plex. He was very shut, however the tax invoice on the acquire from the sudden sale put the alternative buy simply out of attain.

If he may preserve his taxes working for his personal profit utilizing a 1031 trade, it could be a recreation changer—however he didn’t assume he had happy the maintain interval.

Holding Period for a 1031 Exchange

The maintain interval is simply one of many ways in which the IRS differentiates between sellers (intent to promote) and buyers (intent to carry). Investors qualify for 1031 exchanges and sellers don’t. An extended interval of possession may be one indicator of an investor’s intent to carry.

It was three days earlier than he was to shut on the sale from the unsolicited supply. Jay threw out a Hail Mary attraction put up on the BP discussion board.

Based on his query and our follow-up dialog, I used to be in a position to present him how he may use all his revenue—even the taxes—towards the acquisition of his alternative six-plex.

Even although he had held the property solely a short while, he and his accountant decided that he was eligible to defer all tax. This is as a result of the IRS can take many components into consideration when figuring out the intent of the investor in a 1031 trade.

Typically, an funding property is taken into account to be held for commerce, enterprise, or funding and eligible for 1031 tax deferral when you will have owned it for 12 months or extra. Longer is healthier than shorter.

Related: The Ultimate Guide to Real Estate Taxes & Deductions

Showing Intent is Key

The key phrase that the whole 1031 trade statute hinges on is “intent.”

Think concerning the farmer who goes to an public sale and buys a chunk of land. Three months later, he sells it for 10 instances what he paid.

Is he a vendor or investor? His intent may be decided by his historical past, his actions, and his communication.

  • He is a farmer with a historical past of holding property for productive use.
  • Did he plant a crop on the bought land?
  • Or throw up a “for sale” signal?
  • Did he search out the client?

His historical past of holding for productive use, his motion in planting a crop, and his lack of a “for sale” signal show intent. And the unsolicited supply is the strongest piece of proof.

Much like Zillow’s “make me move” appraisal pricing, it’s laborious to argue a couple of deal too good to refuse. I’ve heard many instances from grizzled outdated professionals, “I’ll never sell anything—unless it’s the right price.”

This brings me again to Jay. He had a historical past of rehabbing and renting property. But he discovered himself within the means of promoting a chunk of property that he had solely owned briefly and had meant to make use of for different functions.

The unsolicited supply was that rather more engaging as a result of his curiosity in buying the six-plex (aka a alternative property) to rehab and lease. Fortunately, he had clearly said his intent with the primary property to his household, associates, realtor, and tax skilled previous to receiving the unsolicited supply.

Just as a result of he acquired an unsolicited supply didn’t change his unique intent. It didn’t imply he meant to flip the property all alongside.

He established his intent with integrity and may take a look at himself within the mirror and say, “I truly meant to hold this property.”

calculator with less tax and more tax buttons

Preparing for a 1031 Exchange

Jay made his inquiry concerning a 1031 trade simply 72 hours earlier than his closing. As quickly as he determined to maintain his taxes working for his personal profit as an alternative of instantly forking them over to Uncle Sam, we jumped into motion.

This is as a result of a 1031 trade should be in place previous to the sale of the funding property. And promoting with out the 1031 trade would have made his distressed six-plex alternative property unattainable.

While 1031 exchanges have six necessities that should be adhered to, my group was in a position to stroll Jay by the whole course of. We coordinated along with his closing group to organize the mandatory documentation. We dealt with all of the background work whereas he centered on his sale and buy.

He handily met all necessities and closed his sale and then his buy.

Related: How to Minimize the Tax Bite When Selling Your Investment Property

Checking in on Jay

I checked in with Jay about six months after his trade. He was simply ending up the renovation of his six-plex and had begun renting out models.

He was efficiently in a position to leverage the sudden windfall from his unsolicited supply and his personal taxes into an even bigger and higher deal.

If you personal actual property that you simply bought with the intent to make use of for productive use in commerce, enterprise, or funding, you might qualify for a 1031 tax deferral, no matter your holding interval. The IRS created a protected harbor check in Rev. Proc – 2008-16.

However, you will need to perceive that this protected harbor will not be restrictive or definitive. Outside the protected harbor, no single methodology of documentation supplies a fail-safe litmus check for 1031 exchanges. Yet, numerous case rulings assist different measures.

Explore all choices relatively than hurt your portfolio development potential simply because your circumstances are distinctive. And as at all times, search counsel from an expert monetary adviser accustomed to your scenario earlier than making tax-related selections.


Want to find out how you might be saving extra in your actual property taxes utilizing loopholes, deductions, and extra? Get the within scoop from Amanda Han and Matthew MacFarland, actual property buyers and CPAs, in Tax Strategies for the Savvy Real Estate Investor. Pick up your copy from the BiggerPockets bookstore immediately!


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About Scott Morgan

Scott B. Morgan writes for Debt Management and Real Estate sections in AmericaRichest.

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