Primary Residence Vs. Investment Rental and Capital Gains

[Michelle Mayer]

Good Morning BP!

My name is Michelle and I am looking to buy my first property within the next year or so. I currently live in Brooklyn and I was originally planning on using the FHA loan to get a duplex, live in it for a year while renting out the other half, and then moving out and renting both halves. However, everything in Brooklyn is so overpriced I don't think it would be a good investment unless I wait until the market tanks. (Who knows how long that will be.)

My other idea is to save 20% and buy a duplex in a cheaper area. (Dallas, Orlando, etc.) I would still buy a duplex and rent out both sides but I wouldn't be able to live in it because I have to stay in Brooklyn for work. 

When I bounced this idea off of my boss, (a real estate investor himself) he said that the 2nd option is a bad choice because I would be forced to pay a capital gains tax because I wouldn't be living in the house first. However my thought was that you could do a 1031 exchange to avoid the capital gains. 

Any advice would help! I feel like I'm stuck between a rock and a hard place here. 

[Chris Olewinski]

Hi! I did the first option. I still live in my rental duplex. After year one we refinanced out of the FHA, and into a conventional loan. That same year (2016) we bought a single family rental. But, put 20% down on that. My plan next year is to do a FHA 203k loan on another duplex. Than refinance out after one year.