1031 exchange condo conversion

Dear 1031x:  My clients owned a building with 7 stories (6  residential units and 1 ground retail unit)He plan to condo the building  and sold the top 6 residential units and kept the ground floor unit. Can  this be structured as a 1031X? Thanks

Dear Mr. F:  This question is more complicated than you might think.  1) When property is subdivided it is usually treated as inventory held for resale and taxed at ordinary income rates.  That income is taxed higher than capital gain rates and is not available for 1031x treatment. 2)  If the property has been held for a period of time for investment then the gain, up to present, is capital gain and 1031x eligible.  3) It is only the increase in value due to subdivision and condo conversion that would be ordinary income.  4) The question is: How can we "trap" the gain up to this point as use 1031 to defer this while reporting the subsequent gain as ordinary income?  5)  What we recommend to customers is an immediate sale of the property to a condo conversion and marketing entity.  This sale would be a 1031x.  Then the new entity, with a new tax basis, does the conversion and sells the units with ordinary income treatment on the profit.  Sincerely,

Steve Hickox
Attorney / President