1031 Exchange Question

5 Replies

Hi,

I'm closing on a portfolio of 4 duplexes. All four duplexes are under one LLC and a single commercial loan is servicing the portfolio. I'm considering rehabbing and selling one of the duplexes. My question is this:

If I sell 1 of the 4 duplexes can I 1031 exchange the $ from the sale back into the existing commercial loan? Or do I have to pay taxes on the sale of the duplex? My lender is ok with me splitting up the portfolio like this - so that's not an issue. My knowledge of 1031 exchanges is very limited.

Thank you

ALI

@Ali Hashemi I'm not sure exactly what you mean by "exchange the $ from the sale back into the existing commercial loan."  A 1031 exchange enables you to defer the taxable gain if you roll the proceeds from the sale into the purchase of another property using a specific procedures.  If you are asking if you can use the proceeds to pay down the loan, it would not qualify as a 1031 exchange.

Thanks @Robert Carraway that is what I was asking. If I can’t use it to pay down the loan then I can try and time the sale to occur when I’m ready to make another purchase. Is there a time period in which the funds must be used for another purchase?

@Ali Hashemi You have 45 days from the closing on the property you are selling to identify the property you plan to purchase and 180 days to close the purchase.  You have to use a facilitator, so you can't do this on your own.  I recommend you contact an exchange facilitator to walk you through the process.

Great I will. Thanks for the guidance @Robert Carraway  . Any recommendations where to find a facilitator? My attorney? My CPA? Yellow pages?

@Ali Hashemi , @Robert Carraway 's absolutely correct.  You cannot 1031 into properties you already own or to pay down a  loan on a property you own.

You're lender is probably giving you a partial release when you sell in exchange for a certain % of the net proceeds from the sale of the one unit.

While it is conceivable that you could do a 1031 on this sale I think you need to look closely at the issue of intent.  1031 is only available for properties you have purchased with the intent of holding for productive use.  There is no statutory holding period but what you demonstrate as your intent.  Most folks feel comfortable at a year but there might be some circumstances in the scenario of your portfolio purchase that might warrant you changing your intent.  Explore that with your accountant.

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