1031 Exchange & Condo Conversions
I have owned an apartment building for over 4 years with other partners as Tenants in Common.
We have considered converting the building into condos & selling them.
Our intent was always to hold it as rental property so I would think we have a strong case not to be classified as developers in the eyes of the IRS.
What strategies are effective in keeping it 1031 exchange compliant or at least getting capital gains treatment vs. ordinary income?
Thank You
[ Edited by sanjosee on Date 01/18/2007 ]
ctsee11,
Your reference may be out of date.
Since delayed exchanges are the norm these days, the amount of debt on the relinquished property is irrelevant. For a totally tax free delayed exchange the replacement property purchase must equal or exceed the sale price of the relinquished property, AND, your qualified intermediary must apply all of the exchange proceeds to the replacement property acquisition.
[ Edited by NewKidInTown3 on Date 01/19/2007 ]
Chris is correct,
I am very familiar with the traditional 1031 exchange rules.
My question is specific to orchestrating a condo conversion & the possibility of maintaining a tax deferred or tax favored transaction.
any experts out there with experience in this would be greatly appreciated.
Is the TIC group converting the asset to condos or are you selling to a converter? Also, is the TIC a syndicated TIC or do you know all of your other co-owners?
I am not an attorney nor CPA, but have a great deal of experience with 1031 exchanges.
We are not a syndicated TIC. We are a group of unrelated owners considering to convert our building which we have owned for over 4 years
bump
There is a risk here that the service could take the position that your intent to hold has changed to hold for sale with the conversion and your 1031 exchange could be disqualified. There are structures that can be used and they range from conservative to aggressive. I would be happy to chat with you if you would like to toss around some ideas.
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Bill Exeter[ Edited by wexeter on Date 06/06/2007 ]
would like to see an answer to the OPs question as well. my situation multi unit warehouse building built about 10 years ago by landlord who is thinking of condo converting.
Does this mean that if do a condo conversion of a duplex, and hold both units for 12 to 18 months, the sale of both will qualify for long term capital gains treatment?
What if I sell one unit right away, but hold the other unit for several years. Would the sale of the first unit be taxed as ordinary income, and the second unit be taxed as capital gains?
Thanks.
We are running into this issue quite a bit here in UT as the Condo Converter market is stealing all of our good apartment deals.
Here is what a broker told us would be the best strategy for a situation like yours. It was the understanding that the 1031 issue comes into question when you sell the units one by one. Rather than running the gambit with on technicalities with the IRS, who could try this. Go through with the conversion (paper through the city) and get your multiple tax IDs. Make some of the standard converter cosmetic upgrades to exterior and common areas. Make sure that you minimize any long term leases to month to month. Then sell the whole project to another converter. Perhaps you could create another entity and sell it to yourself. Sure you are leaving a little profit on the table, but you may have to eat that in taxes anyway. You will still make a great profit and get your 1031. In our market a conversion candidate property will sell for a 10-15% premium to a straight apartment deal.
It seems to me that many of the big commercial entities will have a development company and a long term real estate holding company. They will pass deals back and forth like that for that very reason.
I am not a CPA, but I hope this helps. Keep us informed on what you finally decide. I think that paying for a good Real Estate/Tax Attorney would be well worth the money on this one.[ Edited by richnathan on Date 08/09/2007 ]
sanjosee, make sure you check out the market for conversions. The last I heard the market in LA had collapsed significantly .
Also, the parking regulation can kill you as well as the cost to evict the current tenants. (this was Sherman Oaks (LA)).
If you was a referral to an expert atty in LA, I would be glad to pass it along.