1031 into a new primary home

[Lance Friesz]

I am hoping to get some help on a situation we are looking at and would appreciate any input! I also understand that this is not tax advice and I’ll will be working with a CPA.

My wife and I are looking at purchasing a new primary residence that has a separate home/ADU on it. We have a current rental property in the same state that we would like to sell. It has been a rental for more the 5ry's and understand that we would have to pay capital gains on the sale. We are hoping that we could do a 1031 by selling the current rental and rolling the proceeds into the down payment on the new primary home with the ADU. The sale proceeds would be 20%-30% of the down payment

I am not sure on how to think about the loan or the specifics on a 1031 as I know specific timelines need to be met.

I am sure there is more detail that you might need, but thinking this could be a good start.

Thanks in advance!

[Dave Foster]

@Lance Friesz, There's a couple of ways to do this.  It's all going to depend on valuations.  

1. In essence you are purchasing two different pieces of property - a main house and an ADU.

2. The 1031 can be used for the sale and purchase of investment real estate only.

3. So if the rental you are selling is worth the same or less than the value of the ADU then you've got no problem. You can 1031 into the property and designate the ADU portion as the replacement in the 1031. Very similar to buying a duplex and living in one side.

4. But if the ADU wont cover the amount of your 1031 then that complicates things a little. Options...

. A. Use the 1031 for the main house and you live in the ADU for a while until you have satisfied your intent. Maybe that's not preferred. But is there also a basement that could be rented or an apartment over the garage so that you can get the allocation for the investment portion increased?

.    B. Purchase the entire thing as investment and then lengthen your runway a little.  Rent the entire property for a year or so and then move in.  You can convert a property from investment to primary without a taxable event.

Those are a few ways you can make it work.