Up Exchanging Questions

Commercial Real Estate Investing
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Up Exchanging Questions

Bryan Pham
Rental Property Investor · Oakland, CA · Member since 2016 · 602 posts · 250 votes

Hi BP,

Is it possible to up exchange your primary 4 plex into a commercial property? Has anyone does this before? 

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

    @Bryan Pham, yes that is perfectly fine.  When doing a 1031 exchange it is the use not type of real estate that is critical.  Any type of real estate used for productive investment purposes can be exchanged for any other kind of investment real estate.  So the move from residential to commercial is absolutely fine.

    If this 4 plex is something that you live in 1/4th and rent out 3/4ths then you have a mixed use property and can potentially benefit in two different ways.   The portion you live in would be considered your primary residence and if you have lived in it for 2 out of the 5 years prior to selling it you will be able to take the first $250K ($500K if married) of profit tax free from the portion allocated to your primary residence.

    The other 3/4ths would be considered investment property and could be exchanged tax deferred for commercial property.

    So at the end of the day you could conceivably sell that property.  put tax free cash into your pocket and tax defer the remaining profit into the next investment property you want to own.

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  • Bryan Pham
    OP
    Rental Property Investor · Oakland, CA · Member since 2016 · 602 posts · 250 votes
    9y

    @Dave Foster Thanks for the detail response Dave! This was very informative! 

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  • Jose Guevarra
    Real Estate Agent · Mira Mesa, CA · Member since 2014 · 218 posts · 49 votes
    9y

    @Bryan Pham  Dave is correct.  One thing you might consider is your investment goals.  If you want to preserve or increase your current cash flow you will have to keep your debt service low.  This means you will exchange into an only "slightly" more higher value property.  If you want to fully leverage your net equity, e.g. use it as 35% down payment,  then your resultant cash flow will be much lower than what you have now but, your new investment property will be much higher value.   Of course,   it all depends on what and where you exchange into. If you want to see what your net equity will get you in San Diego let me know. 

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