Question about qualification of a 1031 property.

2 Replies

Hello friends, 

3+ years ago I purchased a piece of commercial property that I converted into 3 residential units with the intention of holding long term. Now things have changed and I have the opportunity to turn the units into condos and sell them individually. I would like to do 1031 exchanges for each unit. Would converting to condos from one single piece of property disqualify me from a 1031? 

I haven’t started the process yet, but am about to.

Thanks in advance 

Jeremy 

@Jeremy Petersen , most experts feel that legal entitlements to create options for best and highest use do not disqualify you from a 1031.  Most experts also feel that if you turn a shovel after entitlements that involves you creating inventory and turns you into a developer.  It is still going to come down to your intent.  Certainly it would be best if  you sold as one piece.   It would also be a stronger argument if you had done this and then held the newly created properties for a year or so.  I guess my biggest concern is that it sounds like you're creating three addresses right before selling.  That's different from getting simple zoning entitlements.  Think about your intent and what you can document.

Thank you Dave for your reply. My intent had always been to hold the property as a long term investment. I never intended to convert to condos and sell individually. 

Out of curiosity how long might someone have to hold the newly created condos as investment property before selling one, two or maybe all three and not raise any red flags with the IRS? Ideally I’d like to keep one of the units but move proceeds from the other two to other long term investment property where it doesn’t snow. 

Thanks again for your reply 

Jeremy 

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