How One Couple Profited from a 1031 Exchange?

When Norm and Sandy were transferred from Utah to Georgia, the market was slow. They couldn’t sell the home they were living in, nor a smaller rental home they bought from an estate. So, they hired a rental company to manage the homes, and both rented for close to their mortgage payments. Three years later, interest rates had dropped, and the market had improved, so Norm and Sandy decided to sell the homes. Their strategy was to put the proceeds from the sales into a 1031 exchange escrow with a title company in Utah and find a rental property in Georgia. When they closed on the property where they lived, the funds would be released from escrow and used for a down payment.

The balance of the purchase price would come from a non-owner occupied mortgage. Luckily, the tenants in the smaller home wanted to buy it and were able to qualify for the mortgage payments, which were $80 less than their rent payment. The sale closed, and the $37,000 proceeds went into the title company exchange department’s escrow account. While the paperwork for the rental sale was going forward, Norm and Sandy were out looking for rentals in their area. The market was tight, and they didn’t find anything they liked until two weeks after their home in Utah had closed. (The IRS allows 45 days to identify a property and up to 180 days to close the deal). They made an offer on a two-bedroom condo in a good area for $185,000, and it was accepted. The $37,000 in escrow was used for a 20 percent down payment and the balance financed with a nonowner-occupied mortgage. The equity from one rental home in Utah was transferred to Georgia with no capital gains taxes.

Norm and Sandy’s other rental has six months to go on a lease. If the tenants can’t or don’t want to buy it, the property will go on the market and the process will be repeated. As you can see, the 1031 exchange is a great way to transfer equity from one area to another without losing to capital gains taxes. If you need to move and can’t sell your home, you can rent it until the market improves and still build equity.