1031 Exchange "the like-kind rule"

[Erica Chung]

I have a single family unit home that is going to be sold for $1.2M.

I want to do a 1031 Exchange, but confused what my next property purchase needs to be. Single, multi, commerical..

The new property I want to exchange for is worth $2.5M.

I read online that as long as the like-kind property is used for rental, business or trade, or investment then it is suitable for the exchange.

I'm still not clear about finding a like-kind property. So, if I sell the single family unit house for $1.2M, could I exchange for a 5+ unit commercial property? Because, the exchange purpose is to select property that will generate me income, correct? Could I live in this property too?

Also, when applying the 1031 exchange, the next property cost should be higher than the initial property sold correct?

Need clarification about the 1031 and purchasing a like-kind property

Thanks

Airyca

[Dave Foster]

@Erica Chung,  You've got a good scenario there.  Like kind really just means that it is any kind investment real estate that you intend to hold.  As long as it's real estate, it's not  your primary residence, and you intend to use it for investment (as opposed to fix n flip) then it's like kind for every other type of real estate.  Your move from single family to commercial is just fine.  Al for what it's worth the number of properties don't matter either.  So you could sell one and buy 2 or more.  Or as @Lynn McGeein was doing, consolidate and sell several and purchase one.  What matter is the value and that was your second question.  

In order to defer all tax you must purchase at least as much as your net sale (the contract price minus closing costs) and you must use all of the net proceeds (the cash left after mortgage pay off).  So in your example you're selling for 1.2 and buying for 2.5 so that meets the first criteria.  As long as you use all of the cash from the sale as your down payment then you would defer all tax.

And best of all to your question about living in one of the units.  Remember that in order to defer all tax you must purchase at least as much investment real estate as you sell.  That means that you must only purchase 1.2 in replacement real estate to fully defer all your tax.  Since you're actually buying 2.5 you have 1.3 mil in excess purchase that doesn't have to be used for investment.  So if you're buying a 5 unit for 2,5 then each unit is roughly worth 500K.  You could absolutely move into one (or two) of those units and still defer all the tax in your 1031.

Congratulations!!  You've got a home run scenario lined up.  Make sure you don't close on the sale before engaging a qualified intermediary for the 1031.  They must be in place prior to the sale closing.