OK to do 1031 exchange from an investment property?

Question

I have a rental property where I didn't live in for the last 10 years. I am planning to sell it and to a 1031 exchange for a multi-unit commercial building (residential apartment for 10 units). Does it quality for the 1031 rules?

Michele Shima · Answer

Bill, Dave,

What you said makes sense. Thank you for your reply.

Michele Shima · Answer

@Bill Brandt Ha! I was trying to do that on the first response, but I couldn't figure out everyone was doing it!

You're a Wealth of Knowledge. Thanks again!

@Dave

@Dave Foster Appreciate the info!

Dave Foster · Answer

@Michele Shima, spot on by @Bill Brandt.  As long as the investment portion of the 4 plex is equal to the net sales price of your rental you can use the other unit however you want.  And there are conventional and FHA loans out there that give you favorable financing for small multi units of 4 or less.  This can be a great way to have a 1031 actually purchase your next primary residence.

Bill B. · Answer

@Michele Shima

You would be ok as long as you bought at least 33% more than you sold…

You sell $75k property and buy a $100k fourplex. You’re living in 1/4th, so 1/4th of the $100k doesn’t count, but the remaining $75k does. And that $75k is equal to or more than your selling price.

Bill Exeter · Answer

Hi @Matt Smith

The important criteria is the Qualified Use of the property, which must be rental, investment or business use.  It sounds like both properties will be Qualified Use, so you are good there.  The definition of like-kind is easy.  You must sell real estate and buy real estate, so the like-kind definition is very broad.  I've included a list below.  You can 1031 Exchange between all of these asset classes as long as they are held for rental/investment purposes.

Like-Kind Real Property

The following list of real property asset classes represents interests in real property that usually qualify as like-kind property for 1031 Like-Kind Exchange purposes:

• Single Family Residential Property
• Multi-Family Property (Apartments)
• Commercial Office Properties
• Retail Shopping Properties
• Industrial Warehouse Properties
• Triple Net Lease (Net Lease or NNN) Investment Properties
• Agricultural (Farm) Properties
• Vacant Undeveloped Land
• Oil & Gas Interests
• Mineral Rights
• Water Rights
• Air Rights
• Easements in perpetuity
• Leases with a remaining life, including options, of 30 years or more
• Tenant-In-Common "TIC" Investment Property Interests
• Delaware Statutory Trusts "DSTs" Investment Property Interests
• Vacation rental properties (income producing)

Dave Foster · Answer

@Matt Smith, The type of property doesn't matter in order for you to qualify.  You're selling a property you've used for investment and want to purchase a property which is also your intent to hold for investment.  Residential for commercial, raw land for industrial, multi family for single family all work.

There are a number of criteria that must be met for the 1031 to be valid.  Chief of these is that you use a the services of a qualified intermediary to guide you through the process.  The intermediary must be in place prior to the closing of your sale.

Congratulations on the successful buy and hold.

Bill B. · Answer

@Michele Shima

Hey Michelle. If you throw an @ and then other users names, they will know you responded to them. Otherwise they may never see your message. Just type in the @ sign and then a couple letters of the first name and a drop down of all users that fit will show up.

Michele Shima · Answer

Bill, I just saw your great response about 1031 exchange. Would doing a 1031 exchange from a rental to purchase a primary residence 4-plex? I will live in one, but rent out the other three.

Joel Owens · Answer

Matt the number one issue is selecting a property as one of your three and the numbers change after you are locked in. Now you are looking to buy a property that may be overvalued or have to pay taxes to not do the 1031.

Better is to get all important docs in the LOI stage prior to locking selections so you can feel good about the one or ones you plan on closing on.

Mark Creason · Answer

If you are going to do an exchange, I would like to stress the importance of the 45 day identification period.  They come quickly.

Mark

OK to do 1031 exchange from an investment property?

Most Popular Reply