1031 exchange advice

[Tyler Santos]

I’m looking for some advice about 1031 exchanges. My grandfather in Massachusetts is going to sell his house to take advantage of the tax break he gets since he lost his spouse (my grandmother). He’s 89 years old and wants to travel and live out the remaining years of his life by traveling and enjoying himself. The house, however, is a 4 bedroom 3.5 bath, 3,500 sq. Ft house on Nantucket Island and was recently appraised at 1.7 million. I’m wondering, and I hope this doesn’t come across as shrewd or greedy, is there a way he can get what he wants without selling the house or at least parlaying it into something bigger than he could leave behind to his grandkids and that we could benefit from for the next however many years/generations. Maybe a 1031 exchange is way off base but there has to be something better than selling a house of that size and value on and Island that has very high appreciation rates. Any advice/ideas/suggestions would be greatly appreciated!

[Dave Foster]

Thanks for the shout out @Lien Vuong.  @Tyler Santos, there actually is a way depending on how flexible your Grandfather can be.  In general here's what we know without too many numbers.

1. Half of that property got a step up in basis when your Grandmother so half of the gain went away.

2. Grand pa could sell now and take another $250K of profit tax free.

3. Even doing this he's probably looking at a taxable event because of the size.

4. Right not it would not qualify for 1031 treatment as it was his primary residence.

But there is a scenario where he may be able to get it all.  If he wants to travel now and you could  fund him for a year or so.  He moves out of that house and with your help turns it into a rental.  Now its an investment property so after a year he could sell it.  But the landscape will have changed dramatically.

1. He can still get the step up in basis benefit from your grandmother's passing.

2.He will still get an additional $250K tax free because he still meets the 2 out of 5 residency requirment

3. But now he can do a 1031 because it's an investment property.  So he can 1031 into a good investment property that you can manage, or he can 1031 into passive opportunities that will provide him income for the remainder of his life.  

This is just another twist on exit strategies that we wrote about here - https://www.biggerpockets.com/blog/1031-exchange-files-3-buy-hold-exit-strategies