1031 Exchange Questions

[Jonathan Roldan]

I looking into doing a 1031 exchange on a single family residence (rental) into a multi family (rental). I was talking to my property manager about this and she stated that if I do a 1031 exchange within the first two years of owning the home I would still be taxed heavily. Is that accurate?

Also I read that personal properties are not eligible for a 1031 exchange tax deferral. Does this mean that if the house is financed as a personal residence I would have to refinance as a rental property first?

Thank you. Any information in regards to this process would be greatly appreciated.

[Dave Foster]

@Jonathan Roldan,

Any investment real estate can be exchanged for any other type of investment real estate. By "personal property" it means not real estate.  things like equipment, air planes, boats, stocks and such are not eligible for 1031 exchanges.  Real property is what qualifies for 1031s (Think real estate = real property).  The type of financing is not what makes a property eligible for a 1031.  It is the actual use of the property that qualifies it.

@Jimmy Clark is absolutely right!  If you lived in that property for 2 out of the 5 years prior to selling it you would get the first $250K of profit ($500K if married) tax free.  But since you are using it for investment right now it would qualify for a 1031 exchange.

There is no statutory holding period that qualifies the property.  It is your use and intent.  Most folks feel comfortable with any amount over 1 year (1 year and 1 day guarantees that property will be reported on two consecutive tax returns as Jimmy said).  But there is no magic in that number. It is your intent that qualifies the property.  And there could be circumstances that would justify a shorter or longer hold period.  

Lastly if you do a 1031 you will indefinitely defer all tax.  That is the mechanism that avoids tax.  So if you do a 1031 you will not pay tax regardless of when you do it.