1031 exchange funds into a vacation home/rental

Rental Property Investor · IL · Member since 2019 · 285 posts · 137 votes

BP,

I was hoping someone could answer a quick question for me. I have a large multifamily rental portfolio. Let's say I wanted to sell one of my 8 units and exchange those funds in a 1031 into a vacation home/rental (my portfolio is in the midwest). Am I able to do that since it's technically a "rental property?" Obviously I am trying to defeat capital gains here, but my wife and I wanted to start searching for a vacation home here soon and would prefer this route if possible. Any feedback would be greatly appreciated! Thank you!

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Matt Devincenzo

Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes

Quote from @Matthew Masoud:

From what I understand it needs to be a "like-kind" property.

That means multifamily to multifamily, retail to retail, single family to single family.

I'd call a 1031 intermediary to ask specific questions, they won't charge you for a conversation.

Like kind means real property to real property. So MFR to land is fine, as is MFR to retail etc. It doesn't need to be the same zoning use.

So then MFR to personal vacation use is a no go...but MFR to your new STR would work. So you get your STR going and then at some point could use it as a personal vacation home after meeting the investment req'. I'm sure @Dave Foster can provide more insight into how to make this an effective strategy.

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Matthew Masoud
Investor · Orange County, CA · Member since 2014 · 363 posts · 408 votes
3y
From what I understand it needs to be a "like-kind" property.
That means multifamily to multifamily, retail to retail, single family to single family.
I'd call a 1031 intermediary to ask specific questions, they won't charge you for a conversation.
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Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
3y
Quote from @Matthew Masoud:

From what I understand it needs to be a "like-kind" property.
That means multifamily to multifamily, retail to retail, single family to single family.
I'd call a 1031 intermediary to ask specific questions, they won't charge you for a conversation.

Like kind means real property to real property. So MFR to land is fine, as is MFR to retail etc. It doesn't need to be the same zoning use.

So then MFR to personal vacation use is a no go...but MFR to your new STR would work. So you get your STR going and then at some point could use it as a personal vacation home after meeting the investment req'. I'm sure @Dave Foster can provide more insight into how to make this an effective strategy.

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Matthew Masoud
Investor · Orange County, CA · Member since 2014 · 363 posts · 408 votes
3y
Quote from @Matt Devincenzo:

Quote from @Matthew Masoud:

From what I understand it needs to be a "like-kind" property.
That means multifamily to multifamily, retail to retail, single family to single family.
I'd call a 1031 intermediary to ask specific questions, they won't charge you for a conversation.

Like kind means real property to real property. So MFR to land is fine, as is MFR to retail etc. It doesn't need to be the same zoning use.

So then MFR to personal vacation use is a no go...but MFR to your new STR would work. So you get your STR going and then at some point could use it as a personal vacation home after meeting the investment req'. I'm sure @Dave Foster can provide more insight into how to make this an effective strategy.

Thanks for clearing up my misunderstanding!
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Stephen Jones
OP
Rental Property Investor · IL · Member since 2019 · 285 posts · 137 votes
3y
@Matt Devincenzo
So you think there is some type of loophole?
Thanks for the feedback guys!
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Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
3y
I don't think its a loophole at all. The 1031 rules are pretty clear that you have to sell and then purchase property for investment use. They also make no prohibition from, at some point down the road, using that property yourself. The same as if you 1031'd a rental into a new rental for a few years before moving into it as your new primary residence.
That seems like a pretty obvious scenario to prohibit if the fed wanted to 100% prohibit ever using the property for your own use in the future. They literally just have to add "if a property completed a 1031 and is ever used for personal use, then all taxes are due at full FMV as of the date of change".
Here are some past threads with Dave's words of wisdom:
https://www.biggerpockets.com/forums/104/topics/1000296-1031...
https://www.biggerpockets.com/forums/311/topics/963314-1031-...
https://www.biggerpockets.com/forums/104/topics/619293-1031-...
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y
@Stephen Jones, @Matt Devincenzo, is exactly right. Like-kind means real property for real property of any type - raw land residential, commercial, industrial etc. The other qualifier for 1031 is that it be "qualified use" which means your intent has to be to hold the property for productive use in trade, business or for investment.
So any type of investment real estate can be exchanged for any other type of investment real estate. And there are even specific provisions in the tax code allowing you to use your vacation home for personal use. As long as you are holding it primarily for investment.
Bonus round - Yes, you can eventually convert that property into your primary residence if you want. The IRS allows that as well.
It's hard to call it a loophole when it's been a statute for over 100 years. But you could call it a pretty good opportunity you're looking at :)
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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
3y
As usual, Dave’s the expert’s expert. But… Don’t forget. You didn’t erase those taxes due. You’re simply carrying them forward. If you sell it in the future you will owe all the old taxes plus the new taxes. Unless you’re “lucky” enough to both die first. Then your heirs avoid the taxes.
Ps. You’ll be losing all the the rental income from your exchanges property. So you might be “paying” more than just buying or even renting another vacation property if your plan won’t replace much of the lost income.
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