5 Bedroom house that sold

The opportunity

This summer, one of our long term Vegas tenants moved out.  They were good tenants, but became unable to pay the monthly rent.  Meanwhile, the real estate market in Las Vegas was heated up.  In fact, according to year over year statistics for 2013, Las Vegas prices were up by 30%, and Las Vegas was HOT!

Uncle and I had purchased the 5 bedroom 3 bath North Las Vegas home back in 2009 for $130,000, with a HELOC loan on it for $74,000.  It was a good cash flowing property renting out at $1,700/month – in fact, it was one of the best we had, until we lost our tenants.  Meanwhile, the market had increased the value of this property to over $220,000.

The cleanup and transaction begins

After the tenant left, rehab was begun – repairs, painting, landscaping, and cleaning.  Because of so many investors owning properties in Vegas, rents were dropping.  Rental income would be about $1,500 if we were lucky.  It was time to sell!

We asked for $250,000 – which was a bit on the high side, so we did not have offers for weeks until the price was lowered to $230,000.  (Lesson learned – pigs get fat, hogs get slaughtered.)  Aunty contacted OREXCO to facilitate the exchange.  The sales contract reflected that this was to be a 1031 exchange.

A very nice family wanted this nice big house and a deal was struck at $225,000.

Stuff happens

Meanwhile, because the house stood vacant for about 5 months, we had 2 incidences of break ins, one to the air conditioner, and one break in by smashing a window and stealing most of the appliances.  Since we were in contract and all appliances were to be in good working order, we had to spend about $2,500 to fix the air conditioner, window and replace the stolen appliances.  We also hired a house sitter in the evenings for the last few days to deter future potential break ins.

It closed the day before Thanksgiving – hurray!  We now had 45 days to identify replacement properties for a 1031 exchange.  The funds from the sale of the property (sales price minus what we owed on the HELOC) would sit in escrow until the exchange is complete, or disbursed after 180 days if the exchange is not successful.

Panic

Today was the 45th day after the sale.  Yikes!!!  How did time fly so quickly?!?  A panicked call to the best realtor in Vegas, Martin Fajardo, resulted in us finding 3 great Vegas properties, in good Las Vegas neighborhoods in the $225,000 range.  Aunty filled out the Exchange Identification Notice and sent it off to our 1031 exchange specialist at OREXCO.  (Aunty will be doing a review about OREXCO in the future.)

It has been a stressful day – the identification period is not flexible beyond 45 days.  Aunty’s tendency to procrastinate almost doomed this strategy, the 1031 exchange.

Why do a 1031 exchange?

For the sole purpose of deferring taxes on a gain.  Since we would be profiting $95,000, our capital gains tax on our personal tax return would be about $18,000 (20% capital gains tax).  That is a lot of tax to pay, though it can be offset by losses somewhat.

However, a 1031 exchange allows us to defer the tax on the $95,000 gain IF we purchase real estate worth $225,000 (the sales price) or more, in the time frames that are required, so we won’t have to pay any taxes at this time.  If, in the future, we sell the new property, we can do another 1031 exchange for something equal to or greater than the sales price.  This is like kicking the can down the road.

When does it end?

It can end, if, at some point in time after this and other future exchanges, we decide to sell and pay all the taxes that were deferred.  This is not a good option.

Another way is when we die, the estate will have the property pass to the beneficiaries and the tax deferral goes away.  This is not a great option either, but it is most probable.

Another way to avoid the deferred tax is to live in the 1031 exchanged place for 2 years and have owned it for at least 5 years, thus making it our personal residence, and then selling it.  This could be a great option, but several more timely 1031 exchanges need to occur until Uncle and I are exchanged into a place that we would want to live in.  This is a lot of exchanging and work, but we shall see.  Selling one’s personal residence(s) has enormous benefits.  Enormous.

Or…..

We can just let this exchange fail, and after 180 days, escrow will send us the funds sitting in the account, and we will file a tax return claiming the capital gains and pay the tax due.

Sweet home in Southern Highland

What needs to happen

Since our 45 days to identify properties in the exchange is over, we cannot identify any others.  We need for one of the 3 properties that we identified to OREXCO close within 180 days at a purchase price of $225K or higher.

Will it?

Aunty will post as time goes on.  Hopefully we get accepted on all three offers, and we get to choose and close on the best of them.  Please wish us well.