100% DV in Texas: Property Taxes on Multi-family?

Question

Can you “house hack” a 2/3/4 unit multifamily as a 100% VA-disabled veteran in Texas and avoid paying property taxes if it is your primary?

As a disabled veteran, with a combined 100% rating through the Department of Veteran’s Affairs (VA), you can avoid paying property taxes on your primary residence all together in the state of Texas, as well as some other states. Ah thank the Republic for their patriotism...

Regardless of whether you use a VA home loan to acquire or build a multifamily property; we'll say a four-plex in this case, does the local Texan tax benefit still apply if it is for a multifamily that is your primary residence.

Example: hiring a builder to build out a four-plex property, purchasing an existing four unit property, or renovating an existing multifamily and making it your primary residence (moving into one of the units). Would you still be able to avoid paying property taxes on the entire multifamily property in the state of Texas as a 100% VA DV?

As a bonus question - if you are selling your primary single family home (SFH), which is financed through the VA, can you 1031 exchange into a four unit?

Thanks!

Dave Foster · Answer

@Matthew Nelson, I'll be the income tax guy :). So far @Ross Rauschenbach has given you great news.  I've got even better - You don't need a 1031 exchange to sell your primary and buy a 4 plex.  The 1031 exchange is only for the sale of investment property followed by the purchase of investment property.  Since you're selling your primary you can't use the 1031.

But if you've lived in that property for 2 out of the 5 years prior to selling it you'll get the first $250K of profit tax free ($500K if single).  That's going to be a much better scenario for you.  Because it is tax free instead of tax deferred.  Because there is no reinvestment requirement so all of the new property (the investment portion) can be added to your depreciable basis.  And Because you can use advantageous low down FHA or conventional financing to get the 4 plex as your primary.

Now when you ever sell that 4 plex you'll be able to do a 1031 on the units being used for investment.  And you'll again get to take 25% of the profit tax free if you lived in 1/4th of the property.   This kind of house hacking can be tremendous for you!!

Ross Rauschenbach · Answer

Yes, you would still benefit from the VA exemption even if you didn't use VA financing to build or buy the property, however the savings would only extebd to the portion of the property that is your actual residence. You just submit an application like would for a regular homestead exemption but check the appropriate boxes. The application asks if any portion of the property is incoming producing, so of your living in one of 4 units and leasing the others 75% is income producing and would therefore not be exempted.

source - I'm a licensed property tax consultant in Texas. I also have a real estate license.

edit - I'm a property tax guy, not incone tax, so I don't know about the 1031 exchange. Interesting question though. I hope someone can inform us both.

source - I'm a licensed property tax consultant in Texas. I also have a real estate license.

edit - I'm a property tax guy, not incone tax, so I don't know about the 1031 exchange. Interesting question though. I hope someone can inform us both.

Dave Foster · Answer

@Ronald Rohde, Oops just noticed that I said it was $500K if single.  I meant if married.

When the property has always been your primary residence the only proration if you've lived in it for less than 2 out of 5 is in a very few exceptions.  It you had to move and sell for job or medical related reasons.  Then you get to prorate for the amount of time you actually did live there.

When you convert an investment property into your primary residence and have lived in it long enough to meet the requirements you will then get to prorate the gain between what are called periods of qualified use (as your primary) and periods of non-qualified use (as a rental).  And you will have to recapture any depreciation.

Matthew Nelson · Answer

Gentlemen,

Thanks so much for the added information, on multiple fronts @Ross Rauschenbach @Dave Foster @Andrew Postell @David Bain, to include corrections to information @Ronald Rohde . This clears things up quite a bit and still shows that there is quite a bit of multifamily opportunity to capitalize from regarding this benefit.

Our current home, which we refinanced into the VA IRRRL to get the VA Owner Occupancy clause removed and capture current low rates (at the time; 2.25), would rent out great and I am trying to consider the best avenues to start this process while also taking advantage of current opportunities available to my family.

I have yet to make my first major deal, whether a BRRRR, or initial buy-and-hold, and I have been in the capital accumulation and education phase, but I am looking to get started this year with an initial deal.

Thanks again for each of your inputs!

Ronald Rohde · Answer

$500 if married*. @Dave Foster can you confirm that capital gain exemption is prorated if it was a primary for less than 2/5 years?

David Bain · Answer

Aloha Matthew. Great question.  I'm a veteran myself and specialize in the VA home loan benefit.  In Hawaii specifically, however, one of my most solid connections in the VA space is in San Antonio primarily.  I'll check in and see what they've done.

Andrew Postell · Answer

@Matthew Nelson Good post above, I'm a veteran too and all sounds good to me as well but I wanted to talk about the 1031 exchange thing.  We use a 1031 exchange to avoid capital gains when selling a property.  If you occupy your primary home for 2 years out of the past 5 years, you don't pay capital gains.  It's tax free money when you sell your primary home.  Hope all of that makes sense.

100% DV in Texas: Property Taxes on Multi-family?

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