Residential SFR 1031 to Commercial Purchase?

[Kory Thaut]

I am looking to harvest some SFR equity in Q1 2017 from an investment property I've held for 5 years. Ideally, I'd like to move the gains into a 10 unit commercial property and pull out my initial investment. I already have an LLC for my SFRs and Plexes and would like to use that business for residential commercial multi family.

My question: Is there any possibility of moving the gains (about $250k) from the SFR into the commercial building purchase via a 1031? As you can imagine, I don't really want to pay gains on the $250k.

Thanks,

[Dave Foster]

@Kory Thaut, You can certainly 1031 from residential to commercial.  Your issue is going to be taking some of those gains into your pocket.  If you want to defer all tax the 1031 will require that you purchase at least as much as you sell and that you use all of the proceeds in the next purchase or purchases.  Any cash you take out of that will be taxed as profit first.  I know I know, your initial investment is not taxable and that's what you are pulling out.  The IRS chooses to say that when you do a 1031 the first money you pull out is not your original investment but rather is profit first.  They have both the nuclear and tax codes so they win!

So your solution is to complete a full exchange and then immediately do a cash out refi of the new commercial property.  This will give you the cash you want outside the exchange and not taxable.