Like Kind Exchange – Zero Cash Flow Asset, Part 1

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The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Like Kind Exchange – Zero Cash Flow Asset, Part 1

Question:
I’m a commercial r.e.broker. My client is looking at a Zero Cash Flow (ZCF) purchase with pay down/readvance for his 1031. His accountant asks for an opinion letter on this scenario. Can you help?

Answer:
You have no need for an opinion. A 1031 is a 1031, and the 1031 exchange process is well established. What you need is an explanation of why an investor invests in a Zero Cash Flow property, and how the property functions over time to enable the investor to lower Zero Cash Flow’s debt to a level where the investor can do a 1031 into a cash flow property.

Zero Cash Flow is an investment into which one places cash. Then the investor acquires debt leverage of 80% or greater. The property produces no income, and has a loan that amortizes in a pretty standard way.

The purpose of the ZCF is to acquire the debt, so that the 1031 exchange investor can acquire a property with a lower debt leverage ratio. The plan is for the Zero Cash Flow property to build enough equity or “amortize” in ten years, to the point that when the property is sold, on its own or combined with the sale of another less leveraged property, the investor can purchase a potential cash flow property.

About Marilee: Role of Marilee Hill, Registered Representative (RR)

For free advice on 1031 exchanges, contact Marilee Hill. She has 20 years experience in the business as a real estate broker and property manager, and she understands DST requirements and the security act and everything else as it applies to 1031 exchanges. She’ll point you toward the right resources, for example, a qualified intermediary, and estimate cost and likely outcomes.

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Marilee Hill, MA Hill