1031 exchange commercial property.

1031 Exchanges
7yFollow

1031 exchange commercial property.

Sam Edgin
Rental Property Investor · Washington D.C · Member since 2015 · 5 posts · 1 vote

1031 exchange help needed.. 

So everything I read about 1031 exchange is the same general information. My question is in particular to multi family real estate. If i were to purchase a 50 unit trailer park, does the rule still apply where i would have to live in one of the properties as a primary residence for 2 years? I understand how this law applies to SFR's but I cant seem to find information differentiating between small residential and commercial real estate. I am curious as to how big time investors with many properties manipulate a 1031 exchange. I don't see a big investor living in a trailer within his park to qualify for a 1031, but they still manage to pull of a 1031 exchange when it is time to sell the said trailer park. How is this done? any actual detailed insight to how this works would be greatly appreciated.

0Reply
24 views

Most Popular Reply

Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
7y

Yoo hoo @Bob B. You're up late tonight :)

@Sam Edgin, You're confusing two parts of the statute.  If you sell an investment asset and use the 1031 process to purchase new investment real estate you indefinitely defer paying tax.  The tax doesn't go away per say but as long as you hold the next property or as long as any time you sell that investment property you do another 1031 exchange you will never have to pay the tax.  But that is investment property to investment property.

The two year rule to eliminate taxes is sec 121, the primary residence exemption.  If you live in a property you own for two out of the 5 years prior to sale you can take the first $250K ($500K if married) in profit tax free.  You can do this once every year.

But here's where it gets confusing (but also where the opportunity lies).  You can do a 1031 exchange into a mobile home park no problem.  Let's say you sold an asset for $500K and purchased a 6 unit mobile home park for $600K.  To satisfy the 1031 you must only purchase $500K of investment property.  You could actually move into one of the units (the remaining $100K or purchase) as your primary residence and whenever you sell that property you would 1031 the investment portion and take the residence portion tax free.

Or...You could sell for $500K and 1031 and purchase for $500K.  And after using the property for investment purposes long enough to satisfy that it was your intent to use it for investment you move into one of the units.  After two years you could once again sell and 1031 the investment portion and take a proration of the residence portion tax free.  I say a portion because in the first example you were buying part of the MHP as investment and part as primary residence.  The second example is about converting investment into your primary and the rules are different.  When you convert a property that has been the subject of a 1031 from investment into primary some new rules apply - First you must have owned the new property a minimum of 5 years.  Second you must have lived in the converted investment for 2 out of the previous 5 years.  Third you must recapture all depreciation.  Fourth you can only take a pro-rated % of gain out tax free prorated between the years you used it as investment (non-qualified use) and the years you lived in it (qualified use).

There's a lot of moving parts and you need a QI and accountant who can guide you through it.  Like @Stanley Bronstein said though - you'll never get to move into one unit of a mobile home park and claim the entire sale as tax free.  But with some advance planning this process of conversion from investment to primary residence can be a literal gold mine for folks as they go through their careers.  Instead of using a mobile home park as your example it gets a little easier to digest if you think of doing this to a single family rental or half of a duplex.  

You can read a little more about this specific strategy as part of my story at 

The 1031 Investor5137 Reviews
WebsiteView Page
4Reply
See this reply in the discussion

9 Replies

Jump to latestLatest
  • Christine Kankowski
    Real Estate Broker · Temecula, CA · Member since 2014 · 992 posts · 782 votes
    7y

    The 1031 applies of the money from the sale of the trailer park is reinvested into another investment. 

    THe whole point is not to have to live in it for 2 years to save on the taxes. 

    As long as it is 1 investment to another investment, it shoudl work.  

    AM I missing the point of the question?

    1Reply
  • Kyle Kadish
    Financial Advisor · Manchester, NH · Member since 2017 · 97 posts · 68 votes
    7y

    As @Christine Kankowski points out, do not consider the type of investment. Instead, look at the use.  If you purchase a 50 unit trailer park as an investment, it would be treated the same as a multi family or strip mall.

    0Reply
  • Stanley Bronstein
    Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
    7y

    @Sam Edgin The 2 year primary residence has nothing to do with a purchase of a commercial property. Even if you live in one of the trailer park units, that won't make your entire investment in a commercial property tax free.

    I highly recommend you hire a local CPA and get them to sort this out and help you to understand it.  That will be money well spent.

    3Reply
  • Sam Edgin
    OP
    Rental Property Investor · Washington D.C · Member since 2015 · 5 posts · 1 vote
    7y

    but then why do i have to live in a single family resident for 2 years to avoid taxes even if I have it for investment purposes? Where is the line drawn that decides if you have to live in a property for 2 years to reap the tax benefits?

    0Reply
  • Bob B.
    Investor · Jasper GA · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Sam Edgin Apples and oranges..  

    @Dave Foster will be along shortly to explain everything for us.

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    Yoo hoo @Bob B. You're up late tonight :)

    @Sam Edgin, You're confusing two parts of the statute.  If you sell an investment asset and use the 1031 process to purchase new investment real estate you indefinitely defer paying tax.  The tax doesn't go away per say but as long as you hold the next property or as long as any time you sell that investment property you do another 1031 exchange you will never have to pay the tax.  But that is investment property to investment property.

    The two year rule to eliminate taxes is sec 121, the primary residence exemption.  If you live in a property you own for two out of the 5 years prior to sale you can take the first $250K ($500K if married) in profit tax free.  You can do this once every year.

    But here's where it gets confusing (but also where the opportunity lies).  You can do a 1031 exchange into a mobile home park no problem.  Let's say you sold an asset for $500K and purchased a 6 unit mobile home park for $600K.  To satisfy the 1031 you must only purchase $500K of investment property.  You could actually move into one of the units (the remaining $100K or purchase) as your primary residence and whenever you sell that property you would 1031 the investment portion and take the residence portion tax free.

    Or...You could sell for $500K and 1031 and purchase for $500K.  And after using the property for investment purposes long enough to satisfy that it was your intent to use it for investment you move into one of the units.  After two years you could once again sell and 1031 the investment portion and take a proration of the residence portion tax free.  I say a portion because in the first example you were buying part of the MHP as investment and part as primary residence.  The second example is about converting investment into your primary and the rules are different.  When you convert a property that has been the subject of a 1031 from investment into primary some new rules apply - First you must have owned the new property a minimum of 5 years.  Second you must have lived in the converted investment for 2 out of the previous 5 years.  Third you must recapture all depreciation.  Fourth you can only take a pro-rated % of gain out tax free prorated between the years you used it as investment (non-qualified use) and the years you lived in it (qualified use).

    There's a lot of moving parts and you need a QI and accountant who can guide you through it.  Like @Stanley Bronstein said though - you'll never get to move into one unit of a mobile home park and claim the entire sale as tax free.  But with some advance planning this process of conversion from investment to primary residence can be a literal gold mine for folks as they go through their careers.  Instead of using a mobile home park as your example it gets a little easier to digest if you think of doing this to a single family rental or half of a duplex.  

    You can read a little more about this specific strategy as part of my story at 

    The 1031 Investor5137 Reviews
    WebsiteView Page
    4Reply
  • Bob B.
    Investor · Jasper GA · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Dave Foster Yes I was up late last night, couldn't sleep, excited about finalizing my latest 1031. Great info., as usual.

    1Reply
  • Erin Genz
    Rental Property Investor · Colorado Springs, CO · Member since 2018 · 8 posts · 8 votes
    7y

    Interesting thread and I'm actually following all the logic in @Dave Foster's post so I must be learning!  This certainly makes my little one-to-one house 1031 seem trivial.  Nothing to add to the education piece but I'll definitely stay engaged with this conversation.

    2Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Erin Genz nothing trivial about saving taxes - whether one house or several.  As a matter of fact that what the power of deferred taxes is - the power to use the governments money to grow from one to several - Kudos to you!!!

    The 1031 Investor5137 Reviews
    WebsiteView Page
    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free