FHA Loans and 1031 Tax Deferred Exchange

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FHA Loans and 1031 Tax Deferred Exchange

Isstad Rashadeem
Rental Property Investor · Spring, TX · Member since 2015 · 38 posts · 10 votes

Good Morning BP family,

I found myself entangled in loopholes this morning as I finished drafting my most recent Real Estate 5 year plan. I recently received some advice about forming my strategy as a beginning Investor in Real Estate from some seasoned winners in a discussion. After mulling over different options and hours of debating with myself about multifamily housing, I realized that it is here, on Bigger Pockets, where I better seek shelter from my newbie ideas. 

Goal: I would like to potentially trade my single family primary residence (FHA Loan) that I was intending to rent, and I would like to trade it under a 1031 exchange for two multifamily properties, one of the multifamilies will be my new primary residence.

So here are the questions:

1. Would my sfr qualify if it was never rented?

2. My understanding is FHA's have a period that you have to be a resident. ----- Am I allowed to trade for more than one property property coming from this type of loan? And If so does one of them have to be a different type of loan with different parameters?

3. Is it possible to 1031 trade for two separate FHA properties, one under each person that is on the original loan without running into IRS issues?

If you someone could point me to the right professionals direction that would be awesome! 

Because I'm not sure if I should be contacting a tax specialist, a lawyer, or a my mortgage company that I have the current loan with.... or all of the above.  

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
10y

@Isstad Rashadeem, Accepting the FHA loan established that property as your primary residence until you change the intent and use of that property. 1031 exchanges are only for investment property.

So You're options really are

1. Sell that house after living in it for 2 years out of the previous 5 and take the first $250K ($500K in profit) tax free.

2. Live in the house long enough to fulfill the FHA requirements and then change the use of it to become investment. At this point it probably would be best to rent it - both for income and to cement your use of it as investment if ever questioned. Then you could 1031 it after than any time within 3 years of moving out (so you have still ived in it for 2 out of the previous 5 years) and you could do either a primary residence exemption, or a 1031 exchange, or both.

3.  

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    10y

    FHA loans are for owner occupied, primary residences only. Primary residences are not allowed to be part of a 1031, either on the selling end or the buying end. But, if you live in the property for at least 2 years, the gain is tax free anyway, not just tax deferred.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Isstad Rashadeem, Accepting the FHA loan established that property as your primary residence until you change the intent and use of that property. 1031 exchanges are only for investment property.

    So You're options really are

    1. Sell that house after living in it for 2 years out of the previous 5 and take the first $250K ($500K in profit) tax free.

    2. Live in the house long enough to fulfill the FHA requirements and then change the use of it to become investment. At this point it probably would be best to rent it - both for income and to cement your use of it as investment if ever questioned. Then you could 1031 it after than any time within 3 years of moving out (so you have still ived in it for 2 out of the previous 5 years) and you could do either a primary residence exemption, or a 1031 exchange, or both.

    3.  

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  • Isstad Rashadeem
    OP
    Rental Property Investor · Spring, TX · Member since 2015 · 38 posts · 10 votes
    10y
    Originally posted by @Wayne Brooks:

    FHA loans are for owner occupied, primary residences only. Primary residences are not allowed to be part of a 1031, either on the selling end or the buying end. But, if you live in the property for at least 2 years, the gain is tax free anyway, not just tax deferred.

     Ok, thanks for the clarity. I've never understood it so well, especially in such a short response.

    Under my circumstances my gain is tax free either way and I am free to rent out this property as @Dave Foster was saying or sell, as well as create my new primary residence in a multifamily unit. 

    That is amazing. 

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  • Isstad Rashadeem
    OP
    Rental Property Investor · Spring, TX · Member since 2015 · 38 posts · 10 votes
    10y

    Thanks for the alternate exit @Dave Foster 

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  • Colin Jenkins
    Member since 2023 · 1 post · 0 votes
    3y

    How did you even obtain your single family primary residence under an FHA loan?? FHA loans are only for multifamily properties?

    0Reply
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    3y

    @Colin Jenkins that's definitely not the case. You can buy anything from a single to four unit property...I'd anticipate that MOST FHA loans are actually on SFR and not multi's.

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