1031 Exchange from Residential to Commercial

New to Real Estate · Minneapolis, MN · Member since 2019 · 21 posts · 8 votes

Hi everyone,

I wanted to run this scenario by you to see if it’s feasible. If I house hack for the next five years and gather 5 properties could I then turn around and sell those 5 for a commercial property via the 1031 exchange? I know there are some rules involved however I’m not entirely sure what they are specifically and how they might affect this hypothetical situation above. Let me know if this strategy is possible and if it is, would this strategy be the most efficient way of scaling to commercial properties?

Thanks!

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
5y
@Nick Meland, In general you're strategy would work very well. And there aer all kinds of twists and variables that could sweeten it or jeopardize it.
You've actually got two different things going here. One is your house hack. If by that you mean that you buy a house and rent rooms while you also live there then you will actually qualify for the sec 121 primary residence exemption and will be able to sell that property and take the first $250K ($500K if married) of profit tax free. You can do this once every two years. So in theory you could do this twice over 5 years and free up $500 - $ 1 mil in tax free profit. You dont have to reinvest this money at all. It's yours and it's tax free.
The other properties that you purchase as investment properties would indeed be eligible for the 1031 exchange. And it s perfectly fine to sell several smaller properties and exchange into one larger property. You simply need to purchase at least as much as your net sales in total. So if you had 4 rentals that were sold for $200K each and wanted to combine them into one large property you would need to buy something worth at least $800K.
If you want to go bigger that is perfectly fine. Remember those tax free dollars from your primary sales?? You could supplement your 1031 down payment with some of those and purchase something much bigger.
Kudos to you for planning ahead!!! That will serve you well.
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Nick Meland
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New to Real Estate · Minneapolis, MN · Member since 2019 · 21 posts · 8 votes
5y
@Dave Foster thank you so much for that advice!! I had no idea about the sec 121 exemption. I will definitely look into that!
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