1031 exchange on carriage house portion of primary residence

[Lucy Bennet]

Just looking for some answers I'm having trouble finding. I'm selling a rental property, capital gains will be about $130000. This property was purchased 4 years ago with a previous 1031 exchange. Basically about downpayment at closing table. I realize I must get advice from my CPA but he is out of town this week and just need some general advice as I'm on a time crunch.

Moving into primary residence with a carriage house (CH will be used only as a rental- I will never live there). The 1031 X company has told me I can use the $130,000 towards the carriage house portion of the purchase and first must contact my CPA to write up a document saying how the PP of the entire new property will be split up as primary and investment property and 1031 x portion will only go towards CH.

So far, so good. My lender has also told me that although they will not allow a 1031 ex to be used towards a purchase on a primary residence(as we all know those are the rules), he also told me that they will NOT see the 1031 X docs and after funds for closing have been verified, they will not care where the funds to close are coming from. (ie, they don't care if it is coming from a 1031 exchange company or from my own bank). I will have enough to cover the 20% down without using the 1031 x funds.

Here is where I can't seem to get any direction on: PP for new residence is $655,000 and down payment is 20% ($130000). If I go the route of the 1031 X, then at the closing table, will I need to send in the $130,000 from the 1031 Ex ONLY???? as it will count as my entire downpayment since the bank doesn't see where that money is coming from? OR do you think I will need to send in $130,000 from the 1031 X and then an additional $130,000 towards the primary residence downpayment?

It seems easy enough as I write it out, but no one is giving me a definite YES or NO and if I'm going to have to cough up an additional $130,000 in addition to the $130,000 1031 x then I need to know for sure before I set all this up. Can anyone help?

[Dave Foster]

@Lucy Bennet, I'd be very careful here.  The lender will absolutely see that the proceeds are coming from a 1031 exchange.  And I can't count the number of times I've seen them deny a loan at the last minute because of this when people try to use primary residence money to complete a 1031 exchange.

1. They will source the funds for your down payment which had better be in the QI's account.  

2. The settlement statement has to reflect the 1031 exchange.  IF your QI doesn't do that then you got a whole heap of other problems.

Ir'a nor going to to just get swept under the rug so take that lender with a big shaker (not grain) of salt.

The way to do this is if the Carriage house can be considered a second dwelling with it's own address. Then you can get a conventional or FHA multi-family loan and the mingling of the funds would be just fine.