Question on 1031 exchange

[Larry Hucks]

Hello BP family

I am currently putting an investment property on the market with the idea of doing a 1031 exchange. I would like to by an SFR and "house hack" - live in one room and rent out the others. But, I was reading that you cant use the 1031 for a primary residence. How would I go about this? Would I have to buy the new SFR as an investment property and just live in it, or can I buy it as a primary residence and say I will rent it out?

I am asking in terms of the loan itself since a primary residence loan tends to have a lower interest rate, and also trying to not do mortgage fraud (although my intentions aren't to do mortgage fraud, I really do plan on renting the new property, but I also want to live in a room). Does the IRS actually check what the loan is classified under? Who does the actual verification that the new property is a rental? Could I say I am buying the new property on an investment loan and then eventually convert it to a primary residence?

I guess the real question is for house hackers, do you buy the property as your primary residence or as an investment property?

Thanks for any advice or experience in this subject.

[Dave Foster]

@Larry Hucks, Don't do anything where success depends on the IRS not checking! 

It is possible to purchase a property with a 1031 that you live in part and rent part.  It's very easy if there's two separate dwelling units on site - like a duplex or basement apartment etc.  

Simply living in part of the shared living space of a single family unit is problematic for your accountant to allocate space.  And in fact the IRS makes a point to exclude rental of part of a shared living space from affecting your primary residence exclusion.  So it is very likely that they could make the case the opposite way in terms of your 1031.

But if your accountant can carve out a rental allocation and a primary allocation.  And if the portion allocated to investment is at least equal to the net sale of your old property then you've got a scenario that would work for you to 1031 into something that you live in part of.

The IRS does not really care where you get the money from.  They care about the actual use.  The bank may have some strong feelings.  But these can be worked around.  Just confront them  up front.