Newbie investor recent purchase AND Question about 1031 exchange

[Michael Dorr]

Hey! Just wanted to introduce myself to BP and ask a quick question. Although I've been a member for some months now, this is my first post. 

I'm a newbie investor from St. Paul, MN and I partnered with my brother to purchase our first investment. We've owned for about 6 months and everything has gone smooth. Investment details- FHA, Owner Occupy, Multifamily (duplex), House hack. Since our purchase the market has started to level out but noticeable increase in the value of our property nevertheless. 1 month of sweat equity and a fresh paint job, the place looks pristine. We are living for cheap considering the area and if or when we move out and rent out the entire place there will be a nice cash flow.

My question is about 1031 exchange.

Since we purchased as FHA owner occupy, we must reside in this residence for 2 of the next 5 years to fulfill our lender requirements. However, is it possible to sell before we fulfill the 2 year residence requirement and use a 1031 exchange toward our next purchase, which would be a bigger owner occupy multifamily?

Does it make sense to leverage our duplex to scale into a bigger multifamily? Or do we hold our duplex and take out a second loan to purchase the bigger multifamily?

Thx, 

Michael 

[John Woodrich]

@Tim Swierczek can probably help you regarding the lender requirements.  

From the tax perspective - you can exchange business property but you cannot exchange personal property.  An owner occupied duplex would likely be considered a mixed use property.  The side that is business use you could exchange, the personal use would not be eligible for exchange however if you live their 2 years that side may qualify for the Section 121 gain exclusion.

There are costs to completing a 1031 and timing requirements - with just paint and a little sweat equity how much value do you think you created?  It may not be worth the hassles of structuring a 1031 if there is not a lot of gain to shelter.

If you decide to keep it and try to purchase another property you will likely have to do some explaining to your lender as to why you are moving. Seems they are trying to police this a bit more than in the past, they don't want people getting FHA loans without the intent to live in the property. Changing your mind after 6 months would surely question your intent.

If I were in your shoes I would talk to Tim about your options for purchasing a second property outright.  This will likely require a higher down payment but if  you are making money and can get approved it will allow you to continue investing.