Living in a 1031 Exchange building

[Stephen E Drew]

Hello Everyone. Hope all are well and prospering. I am inside of a situation that I mindfully created and I am wondering if anyone could help shed some light from a new perspective for me. I will lay this out as quickly and simply as possible!

I performed a 1031 Exchange this year. I sold a 3-unit building and bought another 3-unit building. I moved into the first floor of my new building, which for tax purposes nullifies the 1031 exemptions. 

It was a necessity for me to move into the new building. I needed somewhere safe for my daughter and I to live, and my first property was not in a good area. Therefor, I sold the first property and bought a second property in a better area. I then moved into the second property, and when I told my CPA what I had done, he told me that he would not file my taxes with the knowledge of what I had done.

I am trying to figure out a legal way to withhold on paying the capital gains from the sale of my first property. I have listened to people say that they have put A building into an LLC and then rented an apartment to themselves. *I am wondering if this is possible in my situation and whether or not it would be a legal way to live in this building while still performing a 1031 exchange*.

All ideas are welcome and truly appreciated.

And one final note; I fully plan to pay the $10K that I owe in taxes if there is no way around it. I am not trying to be a trickster or a bad person.. I honestly just don't currently have the money for these taxes.. but I will figure it out if necessary! 

Thank you all.

[Will Fraser]

Hi @Stephen E Drew, the most straightforward approach would likely be to consider 1/3 of the purchase of the new property "boot" and the other 2/3 a valid 1031 deferment.

Boot is any portion of the proceeds of a sale that is "taken out" of the deferment exchange or otherwise doesn't qualify.

For example, person A sells farm and buys an apartment building of greater value and daddy want a Caddy, so he goes and buys himself the whip of his dreams.  All of the amount spent on the vehicle is boot and (assuming the purchase of the apartment) followed protocol then it would be a qualified deferment.

I'd recommend talking to a CPA very familiar with 1031 exchanges and talking through this strategy with them.