1031 Exchange for a Condo Rental

A $600,000 condo with $250,000 of equity, doubled dues and a $70,000 assessment: what a cash sale keeps versus what an exchange keeps

Hypothetical: you bought the unit for $350,000, took $60,000 of depreciation and carry a $350,000 mortgage. The association just passed a $70,000 special assessment for structural repairs on top of dues that doubled, and a sale at $600,000 with $36,000 of costs would realize $564,000.

If you pay the $70,000 assessment before closing, it is a capital expenditure that raises basis to $360,000, so the gain is $204,000 rather than $274,000. Federal tax on that gain is roughly $44,000: $15,000 at the 25% rate on the depreciation, about $21,600 at 15% on the rest and about $7,750 of net investment income tax.

A cash sale leaves about $214,000 after the loan and costs and about $170,000 after federal tax, before state tax. An exchange keeps the full $214,000 working and defers the tax, but requires a replacement worth at least $564,000 with at least $350,000 of debt or added cash.

Which parts of a condo interest are real property in the exchange

The unit, your share of the common elements and anything recorded with the deed count. Reg. 1.1031(a)-3 lists houses and apartments among inherently permanent structures and enclosed garages and paved parking areas among real property, and anything that is real property under state law on the closing date is real property for the exchange.

• Deeded parking and storage spaces: real property; if they are separately deeded but customarily transferred with the unit and worth under 15% of it, the incidental-property rule keeps them off your identification count.
• Co-op apartments: stock in a cooperative housing corporation is expressly listed as real property, so a condo can be exchanged for a co-op or the reverse, subject to the board's approval process.
• Club memberships and business licenses: a license or permit to operate a business on real property is not real property regardless of state law, so a mandatory golf or beach-club membership sold with the unit is other property.
• Furnishings in a furnished rental: the contents are personal property, taxed on their own allocation rather than exchanged.

Florida's milestone and SIRS rules and California's reserve studies decide whether your buyer's loan closes

Florida Statute 553.899 requires a milestone structural inspection for condominium buildings three habitable stories or higher by December 31 of the year the building turns 30 (25 at a local government's option near salt water) and every ten years after. Section 718.112(2)(g) requires a structural integrity reserve study every ten years, and for budgets adopted on or after December 31, 2024 owners can no longer vote to waive or underfund reserves for the roof, structure, fireproofing, plumbing, electrical, waterproofing, windows and any other item over $25,000.

California Civil Code 5550 requires a visual inspection of major components at least every three years with a reserve study listing remaining useful life, repair cost and a funding plan, and the board reviews it annually. Both regimes surface deferred costs that were previously invisible, which is where doubled dues and special assessments come from.

Fannie Mae's project standards then govern the buyer's loan: a project is ineligible while critical repairs are unfunded, when unfunded repairs exceed $10,000 per unit within 12 months, or when litigation concerns safety or structure, and lenders must review each special assessment's purpose, status, amount and timeline. The budget must fund reserves at 10% of assessment income or be supported by a reserve study.

Replacements without an association: houses, small multifamily, NNN buildings and DSTs

Trading a condo's assessment risk for a fee-simple asset is the common move. A single-family or 2–4 unit rental puts the roof budget under your control; a net-lease building puts taxes, insurance and repairs on the tenant; a DST holds institutional property with sponsor management and lets $214,000 of equity spread across more than one trust.

Check the identification arithmetic before you settle on one option: three properties of any value, or any number whose total stays within $1,200,000 (200% of a $600,000 sale). If you buy another condo, read its bylaws for rental caps and rights of first refusal before day 45, because a lease restriction on the replacement undermines the investment use you must show.

Timing the sale around the assessment vote and the lender's project review

The 180-day clock runs from your closing, not from the buyer's loan approval, so the association's documents need to be in the buyer's file before you go under contract.

• Order the reserve study, SIRS or milestone report and current budget before listing; the buyer's lender will ask for them, and a missing document can stall a loan past your day 180.
• Pay a capital assessment before closing and keep the invoice: it raises basis. A pending assessment credited to the buyer out of exchange proceeds is treated as cash to you, because assessments are not exchange expenses.
• Hire the qualified intermediary before the deed records and have the closing agent send the full net proceeds to it.
• Name a DST as one of your three identified properties; it gives you a replacement that does not depend on a lender's condo project review.
• Report the exchange on Form 8824 for the year of sale, and check the state pages for Florida and California for state filings.

If the condo was your home first: $250,000 excluded, the rest exchanged

A former residence now rented can use both rules in one sale. Rev. Proc. 2005-14 applies the section 121 exclusion first (up to $250,000, or $500,000 on a joint return, if you owned and lived in the unit for two of the five years before the sale) and section 1031 to the remaining gain, including the depreciation the exclusion cannot cover.

The revenue procedure's own example: a home bought for $210,000, lived in four years, rented two with $20,000 of depreciation, exchanged for a $460,000 rental townhouse plus $10,000 cash. $250,000 of the $280,000 gain is excluded, $30,000 is deferred, and the $10,000 cash is not taxed because boot counts only to the extent it exceeds the excluded gain.

Two limits apply to condos that moved between uses: gain allocated to periods after 2008 when the unit was not your residence is not excludable, and once you acquire a replacement in a 1031 you cannot use section 121 on it for five years. Your CPA or attorney should confirm the two-of-five count and the allocation before the listing goes live.