Hi all,

My dad owns a commercial building and is looking to purchase a beach house investment property. The commercial building is sold. Closing in a few weeks. I told him about doing a 1031 exchange. The commercial building is in his name, not an LLC. Can you use a 1031 from commercial to a residential property investment? Or would there be another way to avoid the cap gains tax? Any insight would be greatly appreciated! Thanks in advance.

You can exchange into another investment property. If he already has the one identified then that should suffice, but he is able to identify up to 3. My recommendation is to contact a 1031 Intermediary to facilitate the exchange details. https://www.ipx1031.com

From there you will have 180 days to close on the new property. Hope this helps and let me know if you have any additional questions. 

@Paul Cattin thanks for the info Paul. From the commercial sale do you have to use all of the money in a 1031 exchange? For example if the com building is sold for $800k and the investment property is $500k. Can that be done or is all of the $800k have to be put forth to the investment property being purchased?

@Gary Gristick

Gary,

You would have to replace 100% of the *net* proceeds from the sale of the “downleg” property. For instance, assume it costs you $80,000 to sell the property (escrow fees, transfer taxes, brokerage commissions, etc.), you would need to acquire a property or properties totaling $720K in value.

@Michael Knudsen

If you acquire a property less than $720K in my scenario, you would have to pay cap gains tax on the “boot”, or the difference between the downleg value less closing costs, and the value of the upleg property (or properties).

@Gary Gristick All of the $800k would have to reinvested, but he could put that money into multiple properties, as long as those properties are still considered investment properties.

@Michael Knudsen thanks Michael, that’s what I figured. Great info!

No problem, best of luck on completing the exchange.  

Here are a few other salient points to consider: 

(1) Find an accommodator ASAP. 

(2) ID Period: you have 45 days upon close of escrow of your downleg property to identify your upleg property or properties by sending a letter to the IRS (handled by your accommodator).

@Gary Gristick , Iots of good info here.  Just to clarify a couple of things.  As @Michael Knudsen said, in order to defer all tax you must purchase at least as much as your net sale (the contract price minus costs of closing).  And you must use all of the cash proceeds (the net sale minus any mortgage pay off).  However, you can purchase less than you sell and you can take cash out but you will pay tax on that amount without jeopardizing the rest of your exchange.  That's a strategic decision.

Like kind refers to use not type of property.  As long as your intent is to hold the property for investment use you can exchange any type of real estate for any other type.  And the number of properties doesn't matter.  It is the amount of reinvestment that determines your taxability. So you can sell one and purchase multiple properties as long as all are for investment.

So a commercial building for a beach house investment property is perfectly acceptable.  And you can use that property some for personal use without jeopardizing your exchange.

Be prepared to only have your federal gain and depreciation recapture deferred in your 1031 if that property is in PA where you are.  PA does not recognize 1031 at the state level.  so although you'll get to defer the federal tax hit.  PA will still stick you with the state portion.

@Gary Gristick he could put the extra leftover funds that are not needed to close on the beach investment in something like a DST where they typically have $100,000 minimums with whatever amount is leftover. If he is accredited that is ....

@Gary Gristick sorry for delay, I didn't see your response. No, you do not. However, you would pay taxes on what you do not exchange. Therefore, the delta of $300k would be taxed. Hope this helps... in time.