1031 duplex into commercial multi family

12 Replies

Hey everybody I have a duplex that I bought in 2016 and lived in for 2 years before moving out and renting both units. I bought it at $266k and it’s worth over $400k now. My goal is to partner with somebody who has commercial multi family experience and 1031 my duplex into a value add multi family property (5-24 units). Does anybody have any suggestions on next steps for me or would you happen to know an experienced commercial multi family investor I could get in touch with? Thanks!

I have a better suggestion. 

You lived in it for 2 of the last 5 years. So you can just flat out sell it and it will be tax free except for the 1-2 years of depreciation payback. 

Then you're not playing by the time line and limits on a 1031. 

@Kyle Ritt , totally agree with @Natalie Kolodij unless you lived in one unit and rented the other one out.  If so then you can only take the primary residence exemption on the unit you lived in.  You'll still need to do a 1031 to defer the gain allocated to the other side.  But you'll also be able to defer all depreciation recapture as well.  So some tax free and some tax deferred.  That will give you more flexibility with a potential deal.

1031 exchanges allow you to change the form of your investment without cashing out or recognizing a capital gain. Your investment can continue to grow tax-deferred. You can also roll over the gain from one piece of investment real estate to another to another. Even if you profit on each swap, taxes are avoided until you sell for cash, which could end up being years later. Hopefully, that means paying one tax at a long-term capital gain rate.

I agree with Dave and Natalie. Use a 1031 on the rented unit and section 121 exclusion on the personal unit. If you are buying the multifamily with someone else, you will have to be in a TIC structure for the 1031 portion of your cash. But you are definitely on the right path.

Originally posted by @Kyle Ritt :

@Michael thank you for your reply! What is a TIC structure?

It is a tenant in common. Essentially you each own an undivided portion of the property, and not a portion of a partnership. In 1031's you must acquire real property, and a partnership interest in real property isn't real property. The tenant in common (TIC) structure alleviates this issue since you are acquiring real property.

@Kyle Ritt the property you exchange Into has to have Identical ownership with the property you are selling. I assume that your current property Is In your Personal name. Do you want to own a multi family Investment property In your own name? The reason for tenant In common Is so your part of the new property can be In your name to satisfy the 1031 Requirements.

@Kyle Ritt Lots of great info here from all "the usual suspects" (@Natalie Kolodij , @Dave Foster , @Michael Skoczylas ), but the following additional info may be helpful to you.

When executing a 1031 exchange, there is a "same taxpayer" requirement as pointed out - but not every change in ownership between the old and new properties violates the "same taxpayer" rule. As @Ned Carey  pointed out, you may not want to own a multi-family unit in your own name, but rather through an entity that would provide liability protection (@Ned Carey Am I understanding you correctly?). Therefore you may prefer to take ownership of your new property through an LLC, which you can do without violating the same taxpayer requirement - provided it is a disregarded entity for tax purposes, which is attainable only if you're the only member (owner) of the LLC.

Spot on @Bernard Reisz .  The IRS identifies the tax payer by the tax return that reports the activity of the property.  So for you @Kyle Ritt you could sell as yourself and buy as a disregarded LLC and not violate the 1031. Or you could sell as yourself and buy as yourself and then contribute into a regarded LLC. That can be done with out triggering a taxable event.

But one thing to watch out for - A disregarded LLC also has to have elected to be taxed as a sole proprietor. So a disregarded entity will not file it's own tax return. All activity will be on your return so you are the taxpayer regardless of who is on deed. Deeding is a state conventions not federal.

Originally posted by @Kyle Ritt :

@Ned Carey thank you! Would I be able to perform a quick claim deed to transfer the property into the name of an LLC so this can be avoided?

There are a number of possibilities and complexities here. Talk to a 1031 exchange expert. By transferring it to another entity you may be fixing one problem and causing another. If it is owned by an entity like an LLC then it would not qualify for the homeowner capital gain exclusion.

No you don't us a Quick Claim deed, the term is "Quit Claim" deed. While you could use a quit claim deed, there may be reasons to use another stronger type of deed. Again this is an area where a true expert like an attorney should be consulted. There are several types of deeds and a quit claim is often a poor choice. 

 

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