Using 1031 from a townhouse to a 5-unit multi family building?

Question

Hi there,I have a townhouse that the lease is up by the coming June. I am thinking to sell it and buy (as the down payment) a 5 to 10 unit multifamily building. Can I use 1031 for this 'transition'? Maybe they are not the 'like kind"?Also I know there are significant differences in the lending practices for a sub-5 or over-5 unit multifamily investing but I dont know enough to judge which way is best for my retirement goals. Thank you in adv for any advise.Jasper

Rob Pecha · Answer

@Jasper Fai this would be considered like-kind so yes, you can utilize a 1031 exchange. Remember that as long as both the relinquished and replacement properties are held for investment purposes it qualifies. As to the financing portion, I really cannot speak to that piece. Best of luck!

Dj Hume · Answer

@Jasper Fai congrats!

I love the growth and I always recommend to continue to grow in units. The more units the less risk, as your spreading it out across more tenants. If you can find a good deal on a 5+ unit in this market, I'd recommend pulling the trigger on it!

Michael Ablan · Answer

@Jasper Fai - Yes you could. Like-Kind means real estate. You wouldn't be able to 1031 into something like the stock market.

Dave Foster · Answer

@Jasper Fai, Property that qualifies for 1031 treatment is any type of real estate you have and are holding for investment. Your move from one townhome to several doors in a MF is absolutely fine. This would be called a form of diversification exchange (moving from one to several or smaller to larger).

The key to complete tax deferral is going to be that you purchase at least as much as your net sale. And you use all of the proceeds from the sale in the new purchase. Going from a town home to a MF building is probably that direction.

Any type of loan will also work. But many times lenders get fixated on % loans simply underwrite for a 20% or 25% or whatever % instead of exactly what the amount of proceeds you have. So make sure that the lender understands how much cash you have to put down. Or you might end up with some of the cash in your pocket and have a taxable event.

Jasper Fai · Answer

Thank you all for the helpful feedback!! Happy New Year!

Using 1031 from a townhouse to a 5-unit multi family building?

Using 1031 from a townhouse to a 5-unit multi family building?

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