House-hacking

[Jacob Casarez]

I just turned 23 and I am 15 months into my first house hack/live and flip deal. My brother and I owner occupy the property and rent out 3 rooms. With just over 40k equity into the deal it's obvious that we want to cash out next May to defer capital gains when our 2 year residence is up. Unfortunately it sounds like I will get hit with depreciation cost from taxes when we cash out -- is there a way to defer this? Can you 1031 exchange a house hack? I need some off the record advice. I am exploring options and like to move quickly. We want to make enough cashflow to eventually leave our 9-5 jobs. Please help, BP! Thanks

[Dave Foster]

@Jacob Casarez, If you've set up your tax records so that you actually report rental income and expenses and take pro-rata depreciation on the rental portion of your house then that portion of your house could be considered to be rental real estate and the 1031 exchange would be appropriate on that portion.

Talk to your CPA, you may find that they have not treated your income that way and that in fact the whole house could fall under sec 121 primary residence exclusion.

One thing I would caution is to make sure that your intent and vocabulary used are consistent with the intent and practice needed to qualify to use the 1031.  1031 exchanges are for property that has been purchased with then intent to hold for productive use in business, trade, or for investment.  While there is not statutory holding period there is the test of intent.  You've certainly held the property for a time and waited for appreciation and used it productively.  However, the common meaning of the word "flip" is that used for properties purchased with the primary intent of re-selling.  It may seem like a little thing but on such things the IRS can get very veklempt about agreeing with your intent and allowing your exchange if audited.

So keep doing what you're doing but call your self and investor not a flipper and your houses investments not flips.