Mother Daughter ADU to Duplex 1031 house hack exchange

Investor · Long Island, NY · Member since 2022 · 35 posts · 32 votes

Was listening to On the Market episode 64 and Amanda Han stated that 1031 exchanges could work on house hacks. Anybody know if this could apply to a mother daughter Adu to a duplex? The Adu was rented by family so that did make it a legal Adu. By theory, that should qualify it for the 1031 in regards to it being an investment property right? It fits the other 2 criteria I'm aware of. Lived in the property for 2 of the 5 years and it was a double closing exchange of properties.

By your understanding, would this qualify for a 1031 exchange? We already know we qualify for the capital gains exclusion per our CPA.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y
@Duane Ward, If that ADU has been treated as investment real estate on your tax return it should be fine. The issue when family members are the tenants is that the IRS likes to see arms lengths terms and amounts. Many times a family member will rent the unit for a token and not market rent. So the IRS loses out on rental income tax. And then also on tax on the sale and 1031.
There is nothing wrong with renting a unit to a family member. Have a lease, collect the rent, declare the rent, and if you want then later gift the rent back. But treat them as a rentor. And yes that's a fine house hack/1031 situation.
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