1031 exchange from duplex to house with a business

1031 Exchanges
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1031 exchange from duplex to house with a business

Rachel Payton
Property Manager · Albany, OR · Member since 2016 · 58 posts · 23 votes

We're selling a duplex we own and plan on buying a house that also operates as a business. (We will be living in the house and running the business) Never done a 1031 before. Where do I start? My lawyer? A bank? Any help is appreciated.

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  • Kevin Sobilo
    Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
    2y

    @Rachel Payton, unfortunately I think the answer is that you don't start. :(

    A 1031 exchange is also called a "like-kind exchange" in that you need to replace the INVESTMENT you are selling with another INVESTMENT similar in type. You are wanting to sell an investment property and replace it with a combination primary residence and business location neither of which is an investment property use.

    Is there any potential for doing a cash-out refinance on the duplex and using those funds for the purpose of buying the property you want? 

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  • Dylan Johnson
    Qualified Intermediary for 1031 Exchanges · Greater Detroit, MI · Member since 2023 · 14 posts · 7 votes
    2y

    Hi @Rachel Payton, 

    The house you are looking at purchasing, does it have a separate space set aside solely for the business or is it a "single family" type home that will just serve as a home office? 

    @Kevin Sobilo, is generally correct in what he mentioned, however, there are a few revenue procedures that could allow for a split allocation of investment & primary portions of each where we could still discuss an exchange. 

    Feel free to shoot me a direct message and we can discuss further. 

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

    @Rachel Payton, The 1031 exchange has to be from any type of investment property and into any other type of investment property.  Your investment intent is what is key.  Much is going to depend on the amount of the house that will be used and allocated strictly for business.  And the need for you to reside on site in order for the business to work.  Examples where this has been done successfully include bed and breakfasts, self storage properties needing 24 hour management presence  with living quarters.  A large multifamily building with one unit dedicated to management living.  Or even a farm with house on site.  

    In each of these situations you and your accountant will determine the amount of the property allocated to the investment and 1031.  As long as the investment allocation of what you purchase is at least as much as your net sale.  And as long as you use all of proceeds from the sale in the purchase.  You'll defer all tax.

    For the 1031 you will use all of your regular professionals in their normal capacity.  With the addition of the Qualified Intermediary whose only role is the administration of the 1031 exchange.  You're actually a neighbor of mine.  I've sent a PM to you along with some starter information on how the 1031 will work.

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  • Rachel Payton
    OP
    Property Manager · Albany, OR · Member since 2016 · 58 posts · 23 votes
    2y

    @Dylan Johnson

    Yes, there is a separate space dedicated to the business. We are buying a funeral home. The first floor of the house and most of the garage is dedicated to the business. The 2nd floor is living space. There is also a basement that currently doesn't have a specific use. Just storage really.

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