1031 Exchange - Need assistance to go from SFR to Commercial

1031 Exchanges
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1031 Exchange - Need assistance to go from SFR to Commercial

Mary Kang
Marietta, GA · Member since 2017 · 15 posts · 3 votes

I'm a newbie to 1031 and have a SFR rental property that is just today under contract...30 day closing. I would like to 1031 into a NNN or NN Commercial property and have to move fast. I need recommendations on great QIs and someone to help me locate the commercial property. Also, the property is under my personal name, so, can I change that later to an LLC, or does it have to remain in my name forever? I thought I could quit claim it...but again I'm a newbie to commercial. Thank you.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y

@Mary Kang It's not quite as cut and dried as what name is on the deed.  The tax payer for the old property has to be the same as the tax payer for the new property.  For you that means that you're personal tax return is actually the tax payer for the property in your name.  Because it the activities of the property are reported on your personal Schedule E.

So your tax return will need to be where the new property is reported as well. That could either be you personally taking title to the new property. Or it could be a "disregarded" LLC. A "disregarded LLC" is one that only has one member, choses to be taxed as a sole properetor and does not file it's own tax return. When these criteria are in place the activity of the property is reported on the tax return of the member of the LLC - you. So whether you own the property as yourself or as a disregarded LLC you are seen as the tax payer for the property.

I usually recommend that you sell as yourself and 1031 buying as yourself. Then after the 1031 is complete you contribute the property into a new LLC. This does not create a taxable event. And it makes a clearer paper trail for the exchange.

But many times (especially with commercial loans) the lender will want to only lend to an LLC. In that case it is to your benefit to sell as yourself and do the 1031 buying as a disregarded LLC.

A good QI will walk you through these options and be your guide through the maze of federal regulation.

BTW - DSTs are delaware Statutory Trusts. They are fractional ownership of a piece of real estate through a special trust (the Delaware Statutory Trust). Very similar to NNN ownership. But you only own a small piece of an asset instead of the entire asset. DSTS also may have many of the expenses of ownership of the property as opposed to NNN where the tenant is responsible for all taxes maintenance and insurance.

One big key factor is that both NNN and DST properties qualify for 1031 treatment. The differences are going to be in the quality of the asset. The strength of the sponsor or manager, and the quality of the lease. They can both be very good options. But you've got to vet well.

The other key factor is that both are designed to be passive but stable opportunities with experienced operators (either the national corporation tenant or the DST sponsor) managing the property so you don't have to. I just got a card from another BP member who we helped move into DSTS and a vacation rental. He signed his 1031 papers about 6 months ago and then went to TX for a motorcycle rally, Oshkosh for the air show, Paris for a d day re-enactment, Memphis for some blues festival, Key West just cause he could and is now slowly working his way back to Maine so he can put some work in on his vacation rental during the summer. Looks like the passive nature of the DST is working for him just fine :)

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  • Brandon BruckmanPro Member
    Financial Advisor · Milwaukee, WI · Member since 2018 · 110 posts · 96 votes
    6y

    @Mary Kang I recommend working with @Lauren Speidel at Exeter as a QI. Have you considered DST compared to NNN?

    0Reply
  • Mary Kang
    OP
    Marietta, GA · Member since 2017 · 15 posts · 3 votes
    6y

    @brandon bruckman

    Thanks for the quick reply. I don't know what I don't know....what is a DST? Thank you.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Mary Kang It's not quite as cut and dried as what name is on the deed.  The tax payer for the old property has to be the same as the tax payer for the new property.  For you that means that you're personal tax return is actually the tax payer for the property in your name.  Because it the activities of the property are reported on your personal Schedule E.

    So your tax return will need to be where the new property is reported as well. That could either be you personally taking title to the new property. Or it could be a "disregarded" LLC. A "disregarded LLC" is one that only has one member, choses to be taxed as a sole properetor and does not file it's own tax return. When these criteria are in place the activity of the property is reported on the tax return of the member of the LLC - you. So whether you own the property as yourself or as a disregarded LLC you are seen as the tax payer for the property.

    I usually recommend that you sell as yourself and 1031 buying as yourself. Then after the 1031 is complete you contribute the property into a new LLC. This does not create a taxable event. And it makes a clearer paper trail for the exchange.

    But many times (especially with commercial loans) the lender will want to only lend to an LLC. In that case it is to your benefit to sell as yourself and do the 1031 buying as a disregarded LLC.

    A good QI will walk you through these options and be your guide through the maze of federal regulation.

    BTW - DSTs are delaware Statutory Trusts. They are fractional ownership of a piece of real estate through a special trust (the Delaware Statutory Trust). Very similar to NNN ownership. But you only own a small piece of an asset instead of the entire asset. DSTS also may have many of the expenses of ownership of the property as opposed to NNN where the tenant is responsible for all taxes maintenance and insurance.

    One big key factor is that both NNN and DST properties qualify for 1031 treatment. The differences are going to be in the quality of the asset. The strength of the sponsor or manager, and the quality of the lease. They can both be very good options. But you've got to vet well.

    The other key factor is that both are designed to be passive but stable opportunities with experienced operators (either the national corporation tenant or the DST sponsor) managing the property so you don't have to. I just got a card from another BP member who we helped move into DSTS and a vacation rental. He signed his 1031 papers about 6 months ago and then went to TX for a motorcycle rally, Oshkosh for the air show, Paris for a d day re-enactment, Memphis for some blues festival, Key West just cause he could and is now slowly working his way back to Maine so he can put some work in on his vacation rental during the summer. Looks like the passive nature of the DST is working for him just fine :)

    The 1031 Investor5140 Reviews
    WebsiteView Page
    2Reply
  • Bob LangworthyPro Member
    Accountant · Brunswick, ME · Member since 2017 · 354 posts · 242 votes
    6y

    @Dave Foster has some great input on this. Another option if you get close to the end of your 45 days is to contact Spencer Taylor of Millcreek Commercial. They have commercial grade NNN properties that anyone can buy into.

    1Reply
  • Mary Kang
    OP
    Marietta, GA · Member since 2017 · 15 posts · 3 votes
    6y

    @ dave foster

    Thank you Dave for the information!  A lot to think about, but a short time to act.  Thanks again.

    1Reply
  • Mary Kang
    OP
    Marietta, GA · Member since 2017 · 15 posts · 3 votes
    6y

    @bob langworthy

    Thanks for the tip!  I have a lot of work to do.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    You're very welcome @Mary Kang.  I see that we're connected on BP.  I'll reach out there to provide some more assistance.

    The 1031 Investor5140 Reviews
    WebsiteView Page
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  • Kyle Winther
    Financial Advisor · Los Angeles · Member since 2020 · 54 posts · 19 votes
    6y

    I would use the DST to identify 3 portfolios with your QI. If you do not have one, I can recommend one that we use for our clients. This way, if you cannot find like kind properties within the 45 day window, you can revert to a DST in as little as 2-4 days to complete the paperwork and defer the capital gains tax. Feel free to message me for more info, and i would be happy to help!

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