1031 Exchange First Timer

[Hunter Gibson]

Hi everybody, 

I am going to talk to my attorney and CPA before doing anything but I wanted to get other peoples opinion on what I can do before that point . I was living in the home for about 6 months and have turned it into a rental for the last 6 month. I want to sell the home and not pay any taxes which is the reason the 1031 comes into play. The 2 questions I have is 

1. How long does the property have to be a rental before you can 1031 exchange it 

2. Can I do a 1031 into a small multi-family home like 2-4 units and live in on of them or does the replacement property have to be 100% rented out for a period of time 

Thanks for all the help 

[Dave Foster]

@Hunter Gibson, There's no statutory time requirement.  The requirement is that you held the property and intended to hold the property for productive investment use.  The range of the spectrum would be that just about everyone is comfortable with an investment use of a year.  At the other end of the spectrum fix n flippers where you buy the property specifically to sell do not count for a 1031 exchange.

Your case is even more cloudy because you clearly bought the property to use for your primary residence.  Then you changed your intent but only rented the property for 6 months.  You would want to be able to demonstrate that your intent when you converted it to a rental was to hold it.  and something caused you to change that intent and sell and 1031.

Your second question is easier.  Yes you can 1031 into part of a multifamiy property and live in the rest.  The key is that in a 1031 you must purchase at least as much investment property as you sell.  As long as the portion of the MF that you will be using for investment is equal to or greater than what you sold you can live in the rest.  

Best news of all - when you later sell that property, if you've lived in it for 2 years you'll get to take the tax free primary residence exemption for the portion you lived in.  And can do another 1031 exchange on the rest.