Can I do this with a 1031 exchange?

[Heather King]

I will be closing on an out of state rental property at the end of the month. I am interested in executing a 1031 exchange. My question is this:

Will a 1031 exchange allow me to pay off my current primary residence if it is converted into a rental/investment property within the 180 day window? Meaning, I would:
   ~close on rental property at 123 Main Street
   ~take profits from 123 Main & 1031 Exchange them by paying off current primary residence at 567 Oak Street
   ~take out new conventional loan and move into new primary residence at 9876 Eagle Ave
   ~rent out 567 Oak Street
   ~complete all tasks within 180 days

I hope that makes sense. Any advice would be greatly appreciated.

[Dave Foster]

@Heather King, @Natalie Kolodij nails it.  It won't work for a couple of reasons.  First the statutory order of  a 1031 requires that you sell before you purchase.  You cannot do a 1031 into property you already own.  Secondly, 1031 is only available for investment property.  You cannot exchange into a primary residence even if you're going to convert it later.  It's got to be investment property when you purchase it.

But here's a twist that would work with some patience.

Sell your 123 Main investment property and complete a 1031 exchange by purchasing a drop dead killer investment property at 9876 Eagle Ave St.  Immediately you could refi it and take the money to pay off Oak St if you want.  But if not then use it for investment for a while and then rent 567 oak and move into Eagle Ave. 

By doing it this way you are selling investment property and buying investment property and later changing your intent which is fine.

Obviously there's a few more things to consider but this would be one way to accomplish what you want and keep your profit on 123 Main tax deferred.