Loan helps investors
beat the clock on property swaps
By Jeff Lazerson
A big challenge for today’s move-up buyer in this tight inventory market is getting the buyer of your home to accept the contingency that allows you to cancel if you can’t find the right replacement home (with loan approval to boot) within X number of days.
For investors trying to defer capital gains taxes after selling a rental and buying another, the challenge can be greater. The time pressure works against you.
Sellers can defer those capital gains taxes under a process called a 1031 exchange, allowing your investment to continue to grow tax deferred.
How about taking the pressure off?
There is an interesting new loan financing tool that accommodates reverse 1031 exchanges. Interest rates run in the high fives to low six percent range. But you can take your time to find the most optimal replacement property possible. Get that under contract first. Then, put the relinquishing rental up for sale.
Through an accommodator, you have to put at least 20 percent down upfront in this 1031 reverse exchange financing.
“The accommodator acts as a temporary owner,” said Marcelo Sroka, president of Irvine based Sroka & Company, CPA’s.
The 1031 lender will fund the loan in the name of the accommodator for the remaining 80 percent loan-to-value on the new investment. As a condition of the financing, the lender will cross-collateralize against the relinquishing investment property.
Qualifying for this reverse exchange financing requires that the investor have at least a 45 percent down payment once the relinquishing property is sold and the funds are moved over to the new investment property.
The cost of the 1031 exchange accommodator can range from $5,000 to $10,000 on a residential transaction.
You should close within 180 days on a reverse 1031, according to Sroka.
There are a lot of moving parts to using institutional financing for a reverse 1031 exchange. Be certain that you get clear direction from your tax advisor and that your real estate agent is experienced in this process. You should also have your real estate attorney or tax attorney look over the documents ahead of signing.
You don’t want to accidently trigger taking a tax hit for not following the IRS rules of the road.
Jeff Lazerson - Mortgage Columnist since 2011