1031 exchange commercial property.

[Sam Edgin]

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.

[Dave Foster]

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