Tax Consequence for house hacking part of a replacement 1031

[Maria Bocanegra]

hello, i am trying to get the numbers correct here - what is the tax consequence %/share/portion for living in a  replacement property purchased with 100% of 1031 funds? Lets assume I have 100k of 1031 money.

My thought is to purchase a replacement property - in this case a multi unit and live in the smallest unit and rent out the remaining units.  Lets assume its a 3 unit flat.

what is the tax consequence? is it the capital gains rate at my income level of 33% x 100k = tax boot/consequence?

thanks!

[Bill Exeter]

Hi @Maria Bocanegra,

Yes, you can do what you are suggesting.  The short answer is that the percent/value of the replacement property that you live in will not qualify toward your 1031 Exchange reinvestment requirements, so only the portion that you rent out will count toward your reinvestment values. 

In your example, if you buy a multi-family property and there are ten (10) units and you live in one of them, only the nine that are actually rented out will qualify toward your 1031 Exchange.  If the units are all the same size, then 90% of the property purchase price (fair market value) will qualify as qualified use property toward your 1031 Exchange.  You would have to make sure that the 90% has a fair market value that is equal to or greater than what you sold in order to defer all of your taxes.