Tearing down house to build duplex. Can I do 1031 for Unit B?

[Chris Schorre]

Hi everyone, looking for some insight on 1031 exchanges. Here's the scenario and facts. 

I own a piece of property in Austin and have for more than 5 years. It is my homestead and I have lived in it for all five years. The property has $500K+ in equity. I plan to tear down the existing structure and build a duplex. Once completed I would like to retain Unit A as my homestead and sell Unit B. Do I need to hold Unit B for a certain period of time before doing a 1031 exchange? I understand many of the other IRS tax requirements associated with 1031 exchanges but this particular issue in unclear to me. I will, of course, talk to my CPA about this but curious to hear thoughts from people knowledgeable about this topic. 

[Dave Foster]

@Chris Schorre, It's an interesting question because there may be more options than you realize.  First there is no statutory holding period that would qualify Unit B to sell and 1031.  The rule is that you must have acquired (constructed) unit B with the intent of holding for productive use.  Most folks feel comfortable at anything more than a year (held as investment).  But there could always be situations where a hold of less or more would be. appropriate.

On one hand the tear down and build create new inventory.  and it would be up to you to have and be able to demonstrate the intent to hold for productive investment use.  A build and sell without a very compelling reason to sell looks a lot like a fix n flip with the intent of resale not hold.

But on the other hand you have a primary residence that you have lived in for several years.  I think it would be a very interesting question to put to your CPA.  Ask them if you can sell Unit B as a primary residence sale.  If so then you could take the profit associated with that portion of the property tax free.  there's some precedence in the regs for splitting and selling a primary in stages.  I'm not that versed in it.  Your CPA should be.  But that would be the bees knees if you could do that.

Otherwise, you'll want to examine intent and then sell and 1031 unit B when appropriate.