1031 Exchange - Mixed use property

1031 Exchange - Mixed use property

Investor · Yorba Linda, CA · Member since 2015 · 3 posts · 0 votes

Hello 1031 pros!

I am preparing to move primary residences and at the same time, sell a rental property that's been in business use for about 10 years. I am seeking to 1031 out of the rental and into a 'mixed use' property consisting of a main house that we live in and then a guest house that I would either rent out for 1-2 years or use as a business office for an established business that I've operated for 5-6 years and paid taxes on, etc, etc. As I understand it, provided the 1031 is constructed such that the value of the guest house is allocated properly (i.e. 33% value assigned to guest house, balance to primary rez) then it would likely pass 1031 muster.

Has anyone here been party to an exchange like this that dances in these grey areas? Please chime in with advice or experience...as well as potentially a QI in So California area who knows what's what.

Thanks very much!

Nick M.

45 views

6 Replies

Jump to latestLatest

Sort by

Leslie Pappas
Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
11y
I suggest you call Ron Ricard at IPX. His number is 408-483-1031, and he has all the answers for you on 1031 exchange. Best of luck!
0 Reply
Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
11y
@Nick Markovsky
The move into mixed use property certainly can be done. It's really no different than a situation with a duplex that is part rental and part live in, or a farm with a homestead and agricultural land, or a new urban office condo with living space above. There are two keys for you to pay mind to in addition to the other 1031 requirements.
1. Work with your accountant to arrive at an accurate and defendable allocation of personal vs investment property. And then make sure that you truly treat the investment allocation as investment and report it appropriately and consistently on your tax forms.
2. In order to completely defer all tax you must purchase at least as much as you sell. If the property you are selling is $200K then you would want to make sure that the entire value of the new property is $600K so that the 33% investment property is worth the $200K of investment property you sold.
Some things that strengthen your case even further would be if the property could be separated into multiple parcels and/or if your seller is willing to give you two contracts on the property to reflect further that you are buying two distinct properties.
The 1031 Investor5137 Reviews
Website View Page
0 Reply
Karen MargraveBusiness Member
Moderator
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
11y
@Nick Markovsky First off, welcome to BP. You've come to the right place to find answers to your questions. Let's invite @Bill Exeter to chime in, he's extremely knowledgable on these issues.
You might want to include some numbers, like what you anticipate selling for, equity, and what you are looking for in the way of purchase price on the new property.
Good luck.
0 Reply
Nick Markovsky
OP
Investor · Yorba Linda, CA · Member since 2015 · 3 posts · 0 votes
11y
Thx for the replies. Here are some valuation specifics:
- Rental prop value: $530k with $160k equity
- Will sell current primary residence for $850k with $150k equity
- Looking to roll all $310k equity into a new primary rez that has a rentable unit or guest house to rent or use as business office thus satisfying business asset criteria.
- New Primary residence value to be in the neighborhood of $900k-$1m, give or take.
- So, Uncle Sam is holding his hand out and I'll be on the hook for roughly $70-$80k in cap gains and depreciation recapture. I'd prefer to give him a high five instead of that cash... :)
- The main question in my mind is the valuation of the guest house. Getting it valued ABOVE the rental property sold will be tough, I think. Any thoughts on how to make it work via 1031 or otherwise?
0 Reply
Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
11y
Hi Nick,
Mixed use properties - or what we refer to as "split use" properties absolutely qualify for 1031 Exchange treatment. You and your tax advisor must make sure that the fair market value allocated to the rental/investment/business use portion of the building is equal to or greater than the net sale price of the rental/investment property being sold as part of the 1031 Exchange.
In your case, the net sale price will be $530K less your routine selling expenses such as broker's commission, title insurance costs, escrow or closing agent expenses, recording fees, exchange fees, etc. Your net sale price will likely be around $490K (ish). This means that the value allocated to the rental/investment/business use portion must be worth at least $490K (ish) if you want to defer all of your tax liability related to the sale of the rental/investment property portion. If the value of the investment property portion is less than the net sale price of $490K (ish) you will recognize and realize some (or all) of your tax liability.
Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
Website View Page
0 Reply
Nick Markovsky
OP
Investor · Yorba Linda, CA · Member since 2015 · 3 posts · 0 votes
11y
Thx for the info. A valuation question then, if the replacement property is of lower value than the sold property by say 20%, would I then pay only 20% of the cap gains + depreciation recapture tax that would have been due or is it an all-or-nothing proposition?
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.

Log In Join for Free