1031 residentials homes to NNN / Commercial
Investor · Minneapolis MN, USA · Member since 2024 · 2 posts · 1 vote
1031 residentials homes to NNN / Commercial
3 Replies
- 1yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Ann Reagan What you are referring to is what we call a consolidation exchange, where you sell multiple properties to acquire a larger property in a 1031 exchange.
There are a few options you could explore to make the exchange process smooth and more successful.
The first option, as you mentioned is to sell them all as a portfolio. But, if you find that selling all your properties as a portfolio is too difficult or you have to take too big a discount, you could un-bundle them and sell them separately. Or sell in smaller packages. You can combine exchanges as long as they close in a tight enough time period that the purchase can meet the time periods for each exchange.
The best strategy to accomplish this is to put the hardest-to-sell property on the market first to give it more time. Or, when you get a contract on your first sale, you negotiate as extended a closing on that as possible to give your other properties more time to sell and bunch closely together. Commercial properties generally have a much longer contract-close period than residential. That will work in your favor as well. Your worst case might be that you get 2 or 3 of your properties bunched and can combine them into one sale. And your other properties into another. Then later sell those two properties and combine them into one larger property. You still get where you want to go. Just in smaller steps.
Another option is what we call a reverse exchange. This is where we take title to your replacement property before you sell your relinquished properties. This way you wouldn't have to stress the time constraints so much and you could just focus on getting all of the properties sold. There are cost, and complexity issues with a reverse exchange however. But it can be done.
In this balanced market, I think you'll find it easy enough to get your properties sold closely enough to make a consolidation exchange work.
The 1031 Investor5137 Reviews - Investor · Minneapolis MN, USA · Member since 2024 · 2 posts · 1 vote1y
Great info - thanks! While I wanted to sell all 4 at once to be able to purchase just 1 larger commercial property, I'm thinking the timeframe to close a commercial property would likely not be that 9-11 month timeframe that I have to wait for my 2 leases to come due (??)--so it puts me in a bit of a conundrum.
I have one home that's vacant, and another one that my tenant is about to draw up an offer to purchase. If he'd be agreeable to wait another 9-11 months, and I'd be okay paying utilities and upkeep on the vacant home for another 9 months, I may be able to bundle all 4 if the timing on all the sales are good. But I'm leaning toward selling the vacant one now and working with my current tenant to sell him the home he's in now. I have enough equity that I can still make an 'ok' 1031 happen into a commercial property -- just not as good as what I had originally hoped.
- Accountant · 1031 Exchange Qualified Intermediary | Nationwide · Member since 2024 · 53 posts · 32 votes1y
@Ann Reagan It sounds like you're in a situation where a combination of forward and reverse 1031 exchanges could be beneficial.
You could start with a forward exchange by selling one or more of your rental homes and use the proceeds to acquire the commercial property you're interested in. This allows you to begin the transition while deferring capital gains taxes on the properties you sell. If you can't sell all four properties during the forward exchange, you can transition into a reverse exchange to acquire the commercial property. In this scenario, you would "park" the commercial property with an Exchange Accommodation Titleholder (EAT) while you continue to sell the remaining rental homes. This gives you the flexibility to secure the commercial property even if all your rentals haven't sold yet.
Be aware that with reverse exchanges, financing can be a challenge, as some lenders may be hesitant to lend to an EAT. Additionally, given the number of properties you have to sell, starting with a reverse exchange means you run the risk of not selling your other properties in time to apply the proceeds to the exchange, which could result in recognizing capital gains.
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