I have a single family rental home I would like to sell. I would like to use the proceeds as a down payment for commercial real estate (raw land). Can I do this through a 1031 exchange?
@Carlos Silva , yes. A like-kind exchange refers to the purpose of the property, not the type. So as long as they're both meant for investment and you follow all other 1031 rules & Regs, this is doable.
@Carlos Silva The rules are very broad. Any type of investment real estate to any other type of real estate is fine for the 1031. As a matter of fact you're in the Oil industry and would appreciate this - Working and royalty interests also count as like kind for regular investment real estate. So you can 1031 exchange a duplex for a royalty or working interest in an oil or gas well.
The one thing you'll want to be ready for is that the 1031 into land will halt the depreciation of any further basis. So you will lose that benefit until you later add structure to the land.
Hi @Carlos Silva ,
Yes, like-kind actually refers to real estate for real estate, so as long as you sell and then reinvest in some type of real estate that is held for rental, investment or business use it will qualify for 1031 Exchange treatment. This allows you to diversify or reposition nicely.
@Carlos Silva here is a quick list (not comprehensive) of what the IRS considers "like-kind" real estate in a 1031 exchange:
- single-family residential
- multi-family residential
- farm or ranch
- storage facility
- net-lease management
- unimproved land
- water rights
- oil rights
- timber rights
- properties with a TIC structure or other fractional interests
- options to purchase
- conservation easements
- Delaware Statutory Trusts
So you can use your proceeds as a down payment on any of these as long as your intent is to hold them for long-term use (investment or business).
Thanks for all the info. The residential property was bought with conventional government backed loan. The raw land will be purchased through an LLC I will need to create and then lease to a different LLC to run a fast food franchise. Will buying a house in may name and then using the proceeds as a down payment for raw land to be purchased with a new LLC keep me from using the 1031 exchange?
@Carlos Silva , maybe not. If you purchased the house in your name then it is reported on your tax return. So you are the taxpayer (not because your name is on the deed but because it is reported on your tax return). If the LLC you form to take title is a single member LLC that elects to be taxed as a sole proprietor then it is what is called a disregarded entity. Because it does not file a tax return all of the activity of the property is still reported on your personal tax return. so eve if the LLC is on title the tax payer is still you and does'n't change. So a disregarded LLC will work for what you're thinking.
If the LLC must be regarded - meaning more than one member or electing partnership or scorp taxation then it is regarded and selling as yourself and buying as a regarded LLC changes the tax payer and would not work with your 1031. Unless you sold as yourself and bought as yourself and then contributed the property into the LLC in exchange for membership interest in the LLC.
Hi @Carlos Silva ,
It will still work as long as the LLC that you use to acquire the replacement property is a single member LLC and a disregarded entity where you are the sole member of the LLC. The disregarded entity means that it is ignored for tax purposes and it is treated as if you bought the replacement property for tax purposes.