1031 Woes Going Into Hawaii

[Katrina Cabral]

I may have managed to find a buyer for my Georgia SFR and get it sold 'before' I close escrow on a condo in Hawaii. So, I could potentially do a 1031 exchange. Crazy question but I'm wondering if it makes sense to do it and if it's even possible given all the variables. I 'think' that one of the rules with a 1031 exchange is that you can not live in the place for some number of months. The new condo in Hawaii needs a lot of work and I plan to move in while making the improvements. The good news is that the place that I'm buying is actually two units that were merged into one large unit and I plan to revert them back to two units. So, wondering if this would provide a loop hole?

Also, I'm debating if I still want to do this whole land lording thing anymore. However, the ability to write off the cost of improvements is tempting, right? The likely hood that I will rent the unit down the road is a high one especially given the location. My expectation is that I will live in one unit, and keep the other unit for friends and family and occasional vacation renters. Would love to hear your thoughts.

[Dave Foster]

@Katrina Cabral, There's around 500,000 1031 exchanges done each year.  So there must be some reason. 

In your case it's really a golden opportunity if you have a lot of gain or depreciation that would have to be recaptured.  

1. Rev Proc 2008-16 gives you a safe harbor for personal use - They will guarantee your investment intent if you use the property personally less than 2 weeks a year or 10% of the days actually rented not counting days you stay there working on the property.  So you're fine by that standard.

2. These numbers are totally made up but you'll understand.  If your old property is being sold for $300K and you are buying the new property for $600K you can absolutely convert it into two units and live in one of them and renting out the other.  You will have sold $300K of investment real estate and purchased $300K of investment real estate.  So that could work as well.