Partial 1031 exchanges?

Question

Hello, I’m a little situation here and I’d greatly appreciate some advice. I bought and lived in a property for 6 months while renovating it. It was purchased for 200,000 and I believe I can sell for 290,000 or so. If I sold it, can I keep 50% of the gains to pay off some debt accumulated from the renovation and use the other half on a down payment for a larger property? If so, would it be possible to 10-31 exchange that half to differ taxes? Thank you!!

Dave Foster · Answer

@Tim Mospanyuk It's worse than that. Because you don't meet the requirements for a primary residence sale all of the gain from the sale will be taxable if you don't do a 1031 exchange.Here's where it gets sticky. In order to do a 1031 exchange you much be selling property that you had the intent of holding for productive use in investment. There's no statutory holding period simply what you can document. And this is hurdle one - You may have indeed purchased it with the intent of holding for productive use but you moved in so you actually used it as your primary residence. I think if you're ever audited you'd have a some splaining to do for why you bought it as an investment but actually moved in. Hurdle number two - you only held it long enough fix and now you're selling. That looks a lot like a fix n flip and would not qualify for 1031. As I mentioned before there is no statutory holding period. But in general the longer the better. Most folks feel good at anything more than a year. But there could always be circumstances where a shorter (or longer) hold period would be justified.So, can you do a 1031. Sure if you can look in the mirror and say that you only lived there to be on site while working on it. And that you had bought it with the intent to hold as a rental but now something drastic had changed your intent.Would this withstand audit?? Probably not just from what you have shared in this forum. but never say never. Field agents can be swayed. And it all depends on the sum and total of your evidence - past history, current practice, documentation with your cpa, The house you legally resided in and never changed your residence while you worked on this one, or the fire that burned down your primary residence and left you homeless except for this house you were working on.Tread carefully but honest people don't fear questions.

Dave Foster · Answer

@Tim Mospanyuk, sorry dude - you're kind in a tweener pickle. You haven't lived in the property long enough to qualify for a tax free sale as your primary residence (unless you meet one of the exceptions). And it sure doesn't sound like you had the intent of holding that property for productive use and your intent was primarily to resell so a 1031 exchange is out. One of the critical elements of the 1031 is that in order to defer all tax you must purchase at least as much as you sell. What the other folks have been suggesting is a course where you do a partial exchange and take some boot. That could work but with the reinvestment requirements any cash you take out or any amount you purchase less than what you sold would be treated as profit. So given what your goals would be any way (taking half of profit as boot and only reinvesting the other half as a down payment) I don't think you'd have much if any tax savings on this one.. You're probably better off passing and paying the tax or staying there for another 1.5 years and getting it all tax free.

Account Closed · Answer

Never done a 1031, but I believe what you are talking about is called a “boot.” You pay taxes on the money you decide to cash out, and do a 1031 on the remaining. Reach out to a 1031 intermediary.

Tim Mospanyuk · Answer

@Dave Foster I see, I appreciate your explanation and time! I will try to negotiate owner financing on this property I would like to purchase and see if I can wait another 1.5 years to sell this one. I may even rent it for a year to make it qualify for a 10-31 exchange. Thanks Dave!

Tim Mospanyuk · Answer

@Lauren Speidel I did have an intent to rent the property and hold it for appreciation but I have this opportunity to buy a great deal, due to limited resources, my plan was to sell my primary and invest it into this home. So given this information I still would not qualify for a 10-31?

Tim Mospanyuk · Answer

Thank you everyone for the valuable advice. @Dave Foster, If I sell my primary residence i've lived in now for six months, and use half the gains as a down payment for this house of greater value, then I would need to pay tax on the the amount I used as a down payment? Im planning to buy this property as a buy and hold.

Lauren Speidel · Answer

Tim Mospanyuk One requirement when completing a 1031 is that you can prove to the IRS, if audited, you had the intent to rent the relinquish property, hold it for appreciation, or use it in a trade or business. Usually fix and flips or property that you purchased with the intent to sell will not fall under Section 1031 guidelines. Let’s say you move out of the property and rent it for 12 to 24 months then it may qualify for exchange treatment.

Joshua Wright · Answer

Agree. Need to talk to a qualified intermediary.