1031 Exchanges for Commercial Real Estate
Commercial real estate investors are among the most active users of 1031 exchanges. Whether you own an office building, retail center, industrial warehouse, or mixed-use property, a 1031 exchange allows you to sell your commercial property and reinvest the proceeds into a new commercial property, deferring all capital gains taxes in the process.
What Commercial Properties Qualify?
Virtually any commercial real estate held for investment or business use qualifies for a 1031 exchange, including:
- Office buildings and professional suites
- Retail centers, strip malls, and single-tenant retail properties
- Industrial buildings, warehouses, and distribution centers
- Multi-family apartment buildings (5+ units)
- Mixed-use properties combining retail and residential
- Hotels and hospitality properties
- Self-storage facilities
- Medical office buildings
- Net lease (NNN) properties
Like-Kind Rules for Commercial Property
For commercial real estate, the like-kind requirement is interpreted broadly. You can exchange any commercial property for any other real property held for investment or business use. This means you can:
- Exchange an office building for an apartment complex
- Exchange a retail center for an industrial warehouse
- Exchange a single commercial property for multiple smaller properties
- Exchange multiple smaller properties for one larger commercial property (consolidation exchange)
Depreciation Recapture on Commercial Property
Commercial real estate is depreciated over 39 years for tax purposes (compared to 27.5 years for residential rental property). When you sell a commercial property, the IRS recaptures the depreciation you have taken at a 25% rate. A 1031 exchange defers this depreciation recapture along with the capital gains tax.
Delaware Statutory Trusts (DSTs) as Replacement Property
Many commercial real estate investors use Delaware Statutory Trust (DST) interests as replacement property in a 1031 exchange. DSTs allow investors to exchange into a fractional interest in a large commercial property, such as a Class A apartment complex or a net-leased retail portfolio, without the management responsibilities of direct ownership.
Work With a Commercial Real Estate 1031 Expert
1031 Federal Exchange provides full-service QI services for commercial real estate investors nationwide. Attorney Steve Wolterman, CES handles all types of commercial exchanges.
Contact us at 513-586-6879 for a free consultation.
Author
Steve Wolterman, Esq., CES
Attorney and Certified Exchange Specialist with over 20 years of experience guiding real estate investors through 1031 exchanges nationwide. Member of the Federation of Exchange Accommodators (FEA).