1031 Exchange - Residential to Commercial

[Jeremiah Forrister]

So, here's a question I have been trying to find an answer to for a few weeks now:

I know a gentleman that wants to sell his residential investment property and use a 1031 exchange to purchase a commercial property with two other partners. After purchasing the property, he and the partners will use the building for their businesses while renting office space to other tenants as well.

1 - Is this a qualified transaction for a 1031 exchange?

2 - If it is not, what could/would make it a qualified transaction?

I don't know if 1031 exchanges are normally complicated, but I have had no success in finding any answers to the question. The best answer I've had so far is, "uhh...maybe."

Do you guys and gals have any insights or wisdom?

[Dave Foster]

@Jeremiah Forrister, Property that qualifies for 1031 exchange is property that is "held for productive use in business, or trade or for investment.  This property is being used for investment (holding for appreciation), for their trade (their business) and for business (the business of rental). Yep a perfect 1031 exchange.

Yes there's some quirks of the 1031 exchange.  But it is the job of the Qualified Intermediary he selects to guide him through the potential mine fields.  And with the right QI and team in place, 1031s are not difficult at all to do.

Just a heads up immediately, he is selling real estate and has to take title to real estate for the 1031 to be valid.  so if he's wanting to go in with other people they will need to purchase the property as tenants in common.  And he will need to make sure that he takes title to a great enough % of the new property to equal or exceed the amount of his sale.