1031 Exchange on Multi-Family

[Kristina Lugo]

Hello from Chicago! How does the 1031 exchange apply to a multi-family unit in the case where 1 unit is rented and the other is a primary residence? I'm reading Garret Sutton's Loopholes book and it doesn't offer suggestions for this circumstance. 

I understand that it needs to be an investment property for 2 years and if I want to also utilize the primary residence tax benefit, then I need to hold it for a total of 5. So could I move forward with a 1031 exchange + primary residence tax benefits if for the full 5 years, the second floor is rented out and I only live in the first floor unit for 3 years, then lease it to tenants for the other 2 tail-end years?

Thanks ahead for lending your time and thoughts!

xoxox Lugo

[Dave Foster]

@Kristina Lugo what you've stumbled on is an awesome tax mitigating strategy for house hackers.  Your dates are a little off.

1. For investment property to qualify for 1031 there is no set holding period.  You must have purchased the property with the intent of holding for productive use.  So it is all about your intent not the time.  However, the longer the better of course.  Three are some who speak of two years.  That's a suggestion from some.  Many others speak of at least one year and one day.  And there is case law that speaks to two tax years and across two calendar years which is a whole range of dates.  Best advice - buy it with the intent to hold and since you're combining 121 and 1031 let the primary dates drive the process and you'll be fine.

2. For your primary residence you do not have to hold it for a total of 5 (unless you are converting a property of yours that had already been purchased with a 1031 exchange).  You must have owned it and lived in it for two out of the 5 years prior to sale.  So you could purchase it and live in it for two years and sell.  Or you could live in it for 2 years and then rent for 2-3 more and then sell and still qualify.

When you sell you must meet both criteria in order to qualify for both.  There must be a portion you have actually resided in and a portion you have actually used for investment.  You will take the % allocated to your primary residence tax free and the portion allocated to investment will be sold with the 1031 exchange.  If your two units are equal then when you sell you'll get 50% of the profit tax free and the 1031 will let you defer the other 50%.

Great strategy!!