1031 money for next house...can I buy owner occupy

[Joe Szymczyk]

if I have money in a 1031...can I use that to buy owner occupy property and get owner occupy interest rate from new mortgage company?

[Dave Foster]

@Joe Szymczyk, Watch out!  Your tax bill will be quite a bit higher than you think as @Steve Vaughan is saying. In your calculations you've got a $30K gain from appreciation. But you'll also have about $100K of depreciation recapture to deal with. Since that's at 25% and with the VA tax you'll be around $7K of tax on the $30K you're looking at a tax bill of over $30K. That might be a stronger motivator!

1031 has to be the sale of an investment property and the purchase of an investment property.  You can't use 1031 dollars to buy your primary residence.  But you can use 1031 dollars to buy an investment property that you later change into your primary residence!  The difference is in your intent when you do the 1031 and how you can document that.  There is no statutory holding period specifically before you can change your intent.  There is a safe harbor from the IRS at two years.  A lot of people feel comfortable at anything more than a year.  There could always be specific circumstances where the holding period before changing it from investment to primary could be shorter (or longer).  So with a little patience this can be done.  But you couldn't just buy it and move into it.

The other very interesting part of your question lies with financing.  If you bought a property with primary financing but did it with a 1031 two things would happen.  First the lender would never allow it since even the down payment has to show it coming from a 1031.  Second, if you're ever audited you'd be in the very awkward position of having to admit you lied to someone.  Either you tell the IRS you lied to the lender and it really was an investment property in which case you've committed mortgage fraud.  Or you tell the IRS you lied to them and it was your primary in which case you're now sharing a toothbrush with Bernie Madhoff!

So I wouldn't recommend that but.... Generally  loans for vacation homes or 2nd homes have the same interest rates as primary residences (or very close).  These are not necessarily designed to work with investment properties.  But they usually don't restrict a property so much that you couldn't use one legally as an investment property.  Usually the rules for lending one a 2nd home are that it be located a certain distance from your primary, and you agree to use it for a couple weeks a year for personal use.  If those are the only two requirements then there is nothing preventing you from using that loan with advantageous interest to purchase a nice investment property that you also use a couple of weeks a year.

Follow the track here - you do a 1031 into a nice vacation rental and use it as such for a year or two.  During that time you also enjoy the use of the property for yourself while enjoying the low interest rate loan and the income from the rest of the year.  After that time you change the use of the property and move into it.  No tax triggered. You sell your now primary and take that gain tax free.  

All in All that is a very sweet scenario.