Tricky 1031 exchange w/ condo conversion

[John Pauler]

Here's a 1031 challenge I am currently going through now...

In March 2014, I purchased a small two family owner occ with a tenant renting the other unit.   

In August 2014, I moved out and have been using it as an investment property ever since. 

Now both of my tenants are interested in purchasing their units, so I am thinking it is a good time to turn it into condos (was physically condo-ready when I bought it, so it is just legal/paperwork), create some value, and re-invest in a larger property. 

I would like to use the 1031 exchange (this would be my first time doing so, total novice here) to avoid paying capital gains and depreciation recapture, but I cannot figure out if this would apply to my situation since I am technically selling the property as two separate transactions. 

Does anyone have experience doing something similar? 

Any advice? 

Thanks! 

John

[Dave Foster]

@John Pauler, You would probably end up treating it like two exchanges but it's pretty straightforward and should work just fine.  Your new condos will each have a legal description.  Each contract to sell would contain the new legal description and be underwritten with title insurance on it's own.  We would use that contract and title issuance to craft your exchange documents.  There is some need to keep an eye on establishing intent to hold due the fact that you are actually creating two new pieces of real estate.  But that is easily overcome.

Once you start each exchange, each will have it's own calendar for identification and completion but there is no reason why you cannot schedule your closings such that you could easily combine the two exchanges into one purchase.

Example - If you sell each side for $150K you would need to purchase 150K to complete each exchange.  But with proper timing you could put the two of them into one 300K property and that would work just as well - a consolidation exchange.  Or keep them separate with their own replacement properties.  Either way you accomplish just what you want - deferral of tax and depreciation recapture.

You've got a lot of options.