FLIP + 1031 + BRRR

[Jimmy Chou]

Hey BP,

Need some thoughts from everyone about possibly combining these strategies FLIP + 1031 + BRRR. I'm currently renting and working on my first flip project. While flipping is the hot and sexy passion of mine, I do want to also get into house hacking to improve my monthly expenses. So I'm considering using the proceeds of the flip and 1031 in to a Duplex or anything else I can hack. If this all works, after BRRRing the money back out, I should still have enough to fund my next flip. On top of that, I expect to defer quite a bit of taxes from the capital gain of my flip.

There's one big technicalities I'm not quite sure about ...

Per my understanding, 1031 only works for exchanging investment properties and cannot be used for primary residence. The flip property is purchased under my company's name, so if I 1031 into something else, it'll still be under my company's name. Would being the owner of the company living there be considered as using it for primary residence? Or would I be okay since my company and I are two different entities? If that's an issue, would paperwork showing that my company leasing it off to myself be a fix? Or is there any other way to get around this rule like leasing it to a family member?

Has anyone tried to 1031 into a BRRR before?

[Dave Foster]

@Jimmy Chou, there's several things you've got going in in this post that need some clarification and further fleshing out.

1.  You're right 1031 is not for primary residence.  However 1031 is for property you purchase with intent to hold for productive use in business trade or for investment.  Any kind of investment property works as long as your intent for use is as stated above.  However, If you buy property with the primary intent of reselling (usually what flip means) then you cannot use a 1031.  Flip properties are usually viewed as inventory and you pay ordinary income tax on the profits and cannot 1031.  It's all about the use of the property, your intent, and how you demonstrate that.  By common usage of the words flips are not eligible for 1031s.  Brrrrs are.

2. Any entity can do a 1031 exchange.  The tax payer on the old and new property have to be the same. However you're "company" may be disregarded for tax purposes in which case the taxpayer for 1031 purposes is you even though your company is on title.  This is an important consideration when looking at ownership in light of the primary residence requirement as well as 1031.  In general the IRS requires direct ownership by the taxpayer claiming the primary residence exclusion.  The two tests are residency and ownership - all the leasing in the world will not change that. 

3. House hacking is a very effective way to generate income to offset living expenses.  If you buy a duplex and live in half and rent half then what you really have is two pieces of real estate - your primary residence and a piece of investment property.  When you sell, if you meet the requirement of living in that half for two of the previous 5 years then you can take up to 250K (500K if married) in gain tax free.  You can also perform  a 1031 exchange on the other half when you sell and make that gain tax deferred.

You're jumping in the deep end but asking the right questions.  Keep fleshing out your specific situation and that can help direct the answers you're looking for.