Today while listening to the Ric Edelman's radio show a women called in. Apparently she was elderly and she owns 2 pieces of property one she currently lives in, and another an undeveloped piece of river front property and as large as 14 acres.
Her question to Ric was that the house she lives desperately needs renovation and she is asking Ric if she can take out money from the other undeveloped property through a 1031 exchange.
Rick answered that 1031 exchange is merely a tax deferred method it takes all the money you get from the property you sell and rolls it into the new property therefore you will not have any money out of this transaction to renovate your home, therefore concluding that this strategy is not for her.
What I was starlet about was that he cut her short by answering what he did and elaborating on any other strategy therefore she might conclude from his answer that she should sell the property and incur a large capital gain and take part or the whole money (I don't know how big of a gain there is going to be) to renovate the property!
The problems I have with this is as follows
- Unnecessary tax to the government
- Taking an appreciating asset like Real estate and converting into a non appreciating asset that's analogous to buying an expensive Bentley for its stereo system that will be taken out.
- For Failing to show the client how to achieve greater financial comfort while holding onto the property and still achieve her objective of getting cash for the renovation of her other property
Now what would you professionals say about this conversation above?
I will follow up with my strategy in my next post!
Sincerely
Joel Silberstein
Mortgage planner
Joel,
It's been awhile since I did many 1031 exchanges, but I think your lady needs to check with a good accountant.
I'd need to check, but I believe it is not necessary to roll all of the sales proceeds into the new property as long as she takes on an equal amount (equal to her existing debt and the cash/boot she receives) of additional debt. She won't be able to access the proceeds until she closed on her new property.
A 1031 is at best a cumbersome approach to her problem, not to mention time consuming and costly, but may be doable. Just not practical.
This is the problem with talk shows, this question needs a lot of research and is probably irrelevant. We need to know a lot more about the woman's situation after all there is no tax problem borrowing for capital improvements.
Bill
William J Archambault Jr
The Real Estate Investment Institute
First National Mortgage Sources