1031 exchange from Multifamily Partnership to SFR

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1031 exchange from Multifamily Partnership to SFR

Sanjeev Kaushik
Renton, WA · Member since 2018 · 21 posts · 4 votes

I have a partnership in a multifamily LLC (2 apartments - 50 units & 20 units) and now we are about to sell the property. Just wondering if I can use 1031 exchange using the proceeds of this sale to buy an SFR. Please share if this is doable and any other helpful link/example.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y

@Sanjeev Kaushik, "like kind" is not your issue.  Any type of investment real estate can be exchanged in a 1031 into any other type.

You'r problem is that I doubt if you own real estate. You own a membership interest in an LLC that owns real estate. In order for a 1031 to be valid you must be selling and buying actual real estate. The LLC you describe is a typical syndication model. And it is the LLC that owns the real estate not you. So, when the property is sold the LLC could do a 1031 exchange. Because it is selling real estate. But you are not. Because you don't own actual real estate. You're simply being paid off for your membership share.

The exception to this would be if you yourself actually own a tenant in common interest in the MF property.  If so then you can indeed 1031 your % ownership of the actual real estate and purchase new investment real estate.

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  • Jordan Alexander
    Member since 2022 · 106 posts · 39 votes
    3y

    Hi Sanjeev,

    Unfortunately, you will not be able to do what you are trying to. When executing a 1031 exchange, the purpose is to upgrade to an asset that is similar to the asset you are selling. In other words, if you want to sell your multifamily property and defer capital gains tax, then you must purchase another multifamily property. They call this a like-kind exchange. Below is a link that explains it better:

    https://www.investopedia.com/f...

    Hope this helps!

    Jordan

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  • Steve WoltermanBusiness Member
    Attorney / Qualified Intermediary · Cincinnati, OH · Member since 2022 · 49 posts · 26 votes
    3y

    Sanjeev, you can sell multi-family property and buy a single family residence in a 1031 exchange.  The key is that the single family residence must be held for active use in a trade or business, i.e., used as rental property and not your residence.  Any real estate that is held for active use in a trade or business is like-kind to other real estate held for active use in a trade or business.  i.e., you can sell multi-family and buy office space or industrial.  

    Further, if you own the multi-family properties in a partnership, the partnership would have to undergo the exchange.  You cannot take your portion from the partnership's sale of the multi-property and invest in replacement property in a 1031 exchange.  Alternatively, and time permitting, you could possibly undergo restructuring of the partnership prior to the sale of multi-property in order to "go your own way" and purchase replacement property with your proceeds.  

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  • Sam Levine
    1031 Exchange, SDIRA, 401(k), Cost Seg · Member since 2022 · 13 posts · 6 votes
    3y

    @Sanjeev Kaushik

    Yes. as long as the SFR is an investment property and not a personal residence it can still qualify as a like-kind exchange and is absolutely doable.

    2Reply
  • Ryan Beatty
    Investor · Calabasas, CA · Member since 2022 · 18 posts · 7 votes
    3y

    Yes you'll satisfy the like kind piece of the exchange, the question is how much of the LLC is exchanging into a new property. I believe when an LLC exchanges into a new property, 51% is the minimum that needs to complete the exchange.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    3y

    @Sanjeev Kaushik, "like kind" is not your issue.  Any type of investment real estate can be exchanged in a 1031 into any other type.

    You'r problem is that I doubt if you own real estate. You own a membership interest in an LLC that owns real estate. In order for a 1031 to be valid you must be selling and buying actual real estate. The LLC you describe is a typical syndication model. And it is the LLC that owns the real estate not you. So, when the property is sold the LLC could do a 1031 exchange. Because it is selling real estate. But you are not. Because you don't own actual real estate. You're simply being paid off for your membership share.

    The exception to this would be if you yourself actually own a tenant in common interest in the MF property.  If so then you can indeed 1031 your % ownership of the actual real estate and purchase new investment real estate.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    3Reply
  • Sanjeev Kaushik
    OP
    Renton, WA · Member since 2018 · 21 posts · 4 votes
    3y

    Thanks @Dave Foster. This makes perfect sense.

    1Reply
  • Jon Taylor
    Pasadena, CA · Member since 2019 · 136 posts · 148 votes
    3y

    @Sanjeev Kaushik -

    @Dave Foster is spot on. But this doesn't mean a tax deferred exchange is not possible. It just means you have a complicated path to follow. There are ways for you to dissolve your LLC and form a TIC. Or, the LLC can do the exchange and the members can achieve their goals from within the partnership agreement.

    Happy to chat if you’d like. DM me if you’d like to discuss it further.


    1Reply
  • Pearse Brolly
    Banker · New York City · Member since 2022 · 2 posts · 0 votes
    3y

    @Sanjeev Kaushik

    Hi Sanjeev, I suggest that you do some research into Opportunity Zones (https://www.irs.gov/newsroom/opportunity-zones.). That may be a way to defer and potentially avoid paying capital gains tax from your sale. Hopefully, it all goes well for you! Feel free to ask me any questions you may have about OZs while you're checking it out.

    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    3y

    The only way(which will likely be tough, is if the partnership distributed the properties to the partners/members of which then you sold your share in the property.
    Likely hard given that it seems like many investors and few properties.

    Talk to your accountant to see if there are other ways to defer/exclude your tax burden

    Best of luck

    [email protected]917-280-8544
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  • Sanjeev Kaushik
    OP
    Renton, WA · Member since 2018 · 21 posts · 4 votes
    3y

    Thanks @Basit Siddiqi. Yes, this is a creative way, but it is hard as you said. @Dave Foster has nailed it very well. Thanks all!

    1Reply
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