1031 Exchange for an Office or Medical Condo

A condo unit is a fee interest in space plus a share of the common elements, and that is like-kind to any other real estate

State condominium acts define what you own. Virginia's, for example, defines a condominium as real property subject to the act and a condominium unit as a unit together with the undivided interest in the common elements appertaining to it. Treas. Reg. section 1.1031(a)-3 lists fee ownership and co-ownership among real property interests, so the unit and its share of the lobby, roof and parking qualify.

The same regulation explains why the unit's systems come with it: a structural component is real property only if you hold it together with a real property interest in the space it serves. A condo owner holds the suite and a share of the building's shared systems, so the plumbing to an exam room or the HVAC serving your suite is part of what you sell. Furniture, phone systems, exam equipment and the practice are not.

The use test is just as broad. Section 1031(a) covers real property held for productive use in a trade or business or for investment, so a unit your own practice occupies qualifies without an outside tenant, and so does one you lease.

The association's declaration can slow a sale or narrow the buyer pool, so read it before you sign a listing

Condominium declarations and bylaws often contain rules a freestanding building does not: rights of first refusal for the association, use restrictions that limit or require medical use, leasing restrictions, signage rules, and approval rights over new owners or tenants. Each one can either add a waiting period before your closing or shrink the pool of buyers.

Your 45-day identification period and 180-day exchange period start when the sale closes, not when you sign the contract, so a right of first refusal or a slow association approval delays the start of the clock rather than eating into it. The bigger risk is on the buy side, where an approval you are waiting on can run past day 45.

Ask the association early for its current budget, reserve study, any pending special assessments and litigation, and the documents a buyer's lender will want. An unfunded roof or garage repair becomes a price reduction or an assessment one of you pays.

Selling the unit to your own practice entity or partners brings in two related-party rules

Practice owners sometimes move the unit into the practice entity or sell it to incoming partners. Under section 1239, gain on a sale of depreciable property to a related person, including a corporation or partnership more than 50% owned by you, is ordinary income. Under section 1031(f), an exchange with a related person loses its deferral if either side disposes of the exchanged property within two years, and section 267(b) supplies the definitions.

Leasing the unit to your own practice is a different matter: it does not stop the unit from qualifying, and a later sale to an unrelated buyer can be exchanged. Our answer on renting a replacement to a family business covers the use side of that arrangement.

Small proceeds narrow the replacement list, and a split between a direct purchase and a DST is common

Hypothetical: a unit bought in 2012 for $600,000, with $120,000 allocated to land, has taken $180,000 of building depreciation, leaving an adjusted basis of $420,000. It sells in 2026 for $900,000 with no loan. On a cash sale the $480,000 gain includes $180,000 taxed at up to 25% and $300,000 of long-term capital gain, with the 3.8% net investment income tax possible on both; a complete exchange defers all of it if you buy at least $900,000 of replacement property with the full proceeds. Run your own numbers with your CPA.

The land figure matters. Publication 551 says a lump-sum price is split between land and building by relative fair market value, or by assessed values for real estate tax purposes if fair market value is uncertain; condo units often carry a small land share, which means more depreciation and more recapture deferred.

With $900,000 to place, the choices are another condo or small building, a single net-leased property at that price, or Delaware Statutory Trust interests, which Rev. Rul. 2004-86 treats as real property and which let a smaller exchange be split across more than one property. Our pages on DST minimums and sizing and splitting an exchange between a DST and a direct property cover the mechanics.

Buying an office or medical condo as replacement property: the declaration, the reserves and the use clause before day 45

Get the declaration, bylaws, rules, budget and reserve study before you identify. Check for use restrictions that fit your plans, leasing restrictions if you will rent the unit out, and approval rights that could delay the closing past day 180. A low reserve balance and an aging roof are an assessment waiting to arrive.

For medical units, check whether the declaration permits clinical use and whether the building's plumbing and electrical capacity support it. If a hospital or health system is a tenant or buyer, the lease rules on our medical office page apply. For an office unit, compare the price per square foot with a small freestanding building on our office building page.

Identify a backup. The three-property rule in Reg. section 1.1031(k)-1(c)(4) lets you list the condo, an alternative unit and a DST interest, and a written revocation can change them until day 45 ends.