SFR to multi family?

Question

Can you 1031 your 1 SFR into 1 multi family or even multiple multi family's? Yes, it's an expensive house. I've been told that it has to be a "like" exchange. Please help!

Dave Foster · Answer

@Matt Good, Let me clear up a couple of things for you.

1. Yes you can 1031 from SFR to MF.  The type of structure is not and issue.  The issue is that the real estate, both that sold and that purchased are "held for productive use in business, trade, or for investment".

However, there is no revenue producing requirement.  So you may exchange residential for industrial, commercial for land, or SF for MF - as long as your intent is to hold it for productive use.

2. It is critical that the tax payer for the old property be the same as the tax payer for the new property.  However this does not preclude using LLCs as you move forward.  A single entity LLC is probably going to be a pass through entity and all activity will be on your personal return anyway. That makes you the real tax payer anyway regardless of the name on title.  Don't let the LLC issue dissuade you.  It's easily overcome.

Matt Good · Answer

Chris Soignier in that case would you have to sell your SFR to your LLC?

Jeff B. · Answer

if you "qualify for the primary residence of sec121", by all means take it - - that's tax free money.

The end-game of a 1031 has a caveat for all that depreciation expense you've written off over the years - - Depreciation Recapture, a euphemism for you get to pay it back :grr

Dave Foster · Answer

@Matt Good  good news. It's even better for you. If you have lived in it for 2 out of the previous 5 year period you can sell and the first 250k of profit is tax free any way (500k if you're married).  Sell away and reinvest or don't - your choice

The only way you get hosed is if you havent lived in it for 2 years yet.  Then you don't qualify for the primary residence of sec121 and its not investment so you can't 1031.  Yes you can convert it to a rental but it will need some seasoning.  Or you may qualify for one of the few exemptions on sec 121.

Matt Good · Answer

@Dave Foster what if the SFR is currently owner occupied? Does it have to become a rental first or no?

Jeff B. · Answer

Yes, you can SFR to MFU - - that's how I got my 6-units.

the 1031 is an exchange of LIKE FOR LIKE, ie income producing property, and it doesn't have to be rental for rental.  As long as the new property produces income (say storage facility), it will qualify.

Chris Soignier · Answer

For all practical purposes, I suspect you're just going to have to suck it up and pay taxes on the gain if you convert your SF investment to MF.    That said, I'm not a tax professional, so you'll get a more definitive answer from a CPA.

Chris Soignier · Answer

I'm not sure if it's technically possible, but MF's are usually acquired via an LLC (for liability protection and ability to raise funds from other investors), and you can't do a like kind exchange from a house to an LLC.

SFR to multi family?

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