[Early Plan] Guidance on 1031 Exchange and Eventual Relocation

San Francisco, California
1031 Exchanges
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[Early Plan] Guidance on 1031 Exchange and Eventual Relocation

Lex Douvas
Member since 2018 · 3 posts · 0 votes

Hi BP - I had a bit of an early stage 1031 exchange question I was hoping to seek the collective wisdom of this group on. 

Context: I have an investment property in CA which I'm going to be 1031'ing into a property in Hawaii. Long-term, the hope is to relocate to Hawaii full-time. We're trying to line the moves up such that we have an easy landing and take maximum advantage of tax shelters. 

Our current plan: is early stage, but I was thinking of sequencing it as: 

(1) Sell the current property (we have an offer that we are in the process of countering)

(2) Find a single family home or townhome to 1031 into. I need to run more analysis on which one would actually be more likely to cashflow. 

(3) Rent the 1031'd property for 2-3 years. 

(4) Relocate to the 1031 property and swap it to a primary residence. 

(5A) If we are happy with the 1031'd property as a primary, turn our (now) former primary residence into a rental, then continue with 1031'ing from there. OR

(5B) If we aren't happy with the 1031'd property as a primary, sell our (now) former primary residence to use the 2-yr capital gains tax shelter, take proceeds from that to buy a new primary. Turn the 1031'd property back into a rental once we have the new primary (and/or sell it and take the tax hit at that point). 


In all cases, we're specifically targeting using the 1031 as a landing pad for when we eventually take the plunge. We've got 2 kidos and pups so the barrier to actually moving if we don't have a place to land (that's pet friendly, etc) are high enough that we'd probably never end up doing it. Because it's partially an investment plan, partially a life plan I'm willing to accept less of a profit on the investment property (I want it to at least break even, but we'll try hard to find one that's cashflow positive still). 

My question to this group -- given the long-term plan of relocating, did I miss any options? Is there a simpler route (other than just doing a mid-term rental)? Any guidance or steers very welcome, including the brutally honest ones, many thanks for your time! 

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  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    4y
    Quote from @Lex Douvas:

    Hi BP - I had a bit of an early stage 1031 exchange question I was hoping to seek the collective wisdom of this group on. 

    Context: I have an investment property in CA which I'm going to be 1031'ing into a property in Hawaii. Long-term, the hope is to relocate to Hawaii full-time. We're trying to line the moves up such that we have an easy landing and take maximum advantage of tax shelters. 

    Our current plan: is early stage, but I was thinking of sequencing it as: 

    (1) Sell the current property (we have an offer that we are in the process of countering)

    (2) Find a single family home or townhome to 1031 into. I need to run more analysis on which one would actually be more likely to cashflow. 

    (3) Rent the 1031'd property for 2-3 years. 

    (4) Relocate to the 1031 property and swap it to a primary residence. 

    (5A) If we are happy with the 1031'd property as a primary, turn our (now) former primary residence into a rental, then continue with 1031'ing from there. OR

    (5B) If we aren't happy with the 1031'd property as a primary, sell our (now) former primary residence to use the 2-yr capital gains tax shelter, take proceeds from that to buy a new primary. Turn the 1031'd property back into a rental once we have the new primary (and/or sell it and take the tax hit at that point). 


    In all cases, we're specifically targeting using the 1031 as a landing pad for when we eventually take the plunge. We've got 2 kidos and pups so the barrier to actually moving if we don't have a place to land (that's pet friendly, etc) are high enough that we'd probably never end up doing it. Because it's partially an investment plan, partially a life plan I'm willing to accept less of a profit on the investment property (I want it to at least break even, but we'll try hard to find one that's cashflow positive still). 

    My question to this group -- given the long-term plan of relocating, did I miss any options? Is there a simpler route (other than just doing a mid-term rental)? Any guidance or steers very welcome, including the brutally honest ones, many thanks for your time! 


     Do you have a QI already? If not you're going to need one anyways and they can go over lot of this.

    1031 rules in general can be interpreted differently depending on your risk appetite, but a lot comes down to intent.

    If you need a intro, I can help and share my experience of how I handled a similar situation... Message me

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    4y

    @Lex Douvas, that's a great plan.  A couple additions that may sweeten the pot for you.

    At "4" when you convert the rental into your new primary you may want to sell your current rental since you will get the first $500K of profit tax free.  This money can go into your pocket.  Or it could buy another investment property.  Or it could fund some retirement.  The key is that it is tax free and you can simply hold it and wait.

    Meanwhile, when you convert the rental into your new primary you can get a partial exemption later for the sale of it once it is your primary.

    Once you have owned it for 5 years and once you have lived in it for 2 out of the 5 years prior to sale.  You can sell it and after recapturing depreciation you will get a proration of the gain tax free from the years you lived in it.  So if you rented it for 2 years and lived in it for 3 years you would get 60% of the gain tax free.  You still pay tax on the rest.  But some tax free is better than no tax free.  

    And if you followed that scenario and rented it for 2 and then lived in it for 3 and then moved out and rented it for another year (use your first tax free sale to buy your next primary residence conversion).  Then you would not only get the proration.  You could also do a 1031 exchange on the rest.  So you would get some tax free and the rest tax deferred again.

    And that is how you throw gasoline on the fire with this strategy using a 1031 exchange. 

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