Residential SFR 1031 to Commercial Purchase?

Question

I am looking to harvest some SFR equity in Q1 2017 from an investment property I've held for 5 years. Ideally, I'd like to move the gains into a 10 unit commercial property and pull out my initial investment. I already have an LLC for my SFRs and Plexes and would like to use that business for residential commercial multi family.

My question: Is there any possibility of moving the gains (about $250k) from the SFR into the commercial building purchase via a 1031? As you can imagine, I don't really want to pay gains on the $250k.

Thanks,

Dave Foster · Answer

@Kory Thaut, The tax payer needs to be the same on the relinquished and replacement properties when doing a 1031. So you'll need to complete the 1031 in your name and then immediately after contribute the property into the LLC. Other than that there is no difference or distinction in taxation when shifting types of real estate. There are several steps to the process. The white paper I sent you lays them out. The first and most important is that the QI must be in place prior to the closing of your sale. They guide you through the rest of the maze.

Dave Foster · Answer

@Kory Thaut, You can certainly 1031 from residential to commercial. Your issue is going to be taking some of those gains into your pocket. If you want to defer all tax the 1031 will require that you purchase at least as much as you sell and that you use all of the proceeds in the next purchase or purchases. Any cash you take out of that will be taxed as profit first. I know I know, your initial investment is not taxable and that's what you are pulling out. The IRS chooses to say that when you do a 1031 the first money you pull out is not your original investment but rather is profit first. They have both the nuclear and tax codes so they win!

So your solution is to complete a full exchange and then immediately do a cash out refi of the new commercial property. This will give you the cash you want outside the exchange and not taxable.

Account Closed · Answer

I understood the relinquished property is titled to the LLC. I think Dave was assuming it was in your name. So the LLC is doing the exchange as he stated needs to happen so you should be ok.

Dave Foster · Answer

@Kory Thaut, If the property is already in your LLC then simply leave it there. The LLC will be the exchangor. It will sell and then do the 1031 and purchase. Simple enough.

If your LLC is a single member LLC that does not file a tax return then for IRS purposes it is a disregarded entity. All the activity of the property is on your personal sched E and the IRS views you as the taxpayer anyway. In that event you may sell as either yourself or the LLC and buy as yourself or the LLC.

Sometimes financing in an LLC is more difficult. this is when a disregarded LLC can help since you can sell as the LLC and buy as yourself before quit claiming back to the LLC (with your lender's permission of course)

Mark Creason · Answer

Kory,

Like kind is considered real estate for real estate. You could trade your sfr for land, retail, industrial, office, multifamily and even another sfr.

Mark

Kory Thaut · Answer

Account Closed comment above makes sense, but I am wondering about how I'll first get the new property acquisition underway as the LLC when the QI might be holding funds as me personally. I don't want to buy the commercial property personally, I want that in the business out of the gate.

Thank you both for your help.

Account Closed · Answer

I would get with your QI on this.......I believe you can leave it LLC to LLC. you just personally guaranteed the mortgage. Get pre-qualified with your mortgage broker as well or you can look at other options for replacement property that has financing in place. Give me a call if you want - may be too complicated to discuss on posts here.

Kory Thaut · Answer

@Dave Foster Thanks again for the detail and white paper.

Kory Thaut · Answer

@Dave Foster Thank you for the clarification... esp on the withdrawals all being viewed as pulled from profit first. That could have been an expensive mistake.

I think most of my pause comes from the fact that I'd be buying the commercial property as an LLC, not as an individual. How does the individual tax savings of the 1031 from an SFR transfer over to the business purchase? And, are there additional steps needed in this scenario?

Thanks again,

Residential SFR 1031 to Commercial Purchase?

Residential SFR 1031 to Commercial Purchase?

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