1031 replacement property on lot next to personal residence?

Question

Hello. I'm new to this forum and there seem to be some very knowlegable folks here!

We are in the process of moving from Oregon to Idaho and have a complicated potential 1031 situation. We are selling our vacation rental in Welches, OR for $870K and we bought it for $346K. We have a $200K mortgage. We are going to rent out our personal home outside Portland, OR and buy a new house in Idaho. One of the properties we are looking at is actually two adjacent lots. The house sits on one 2 acre lot and the other 2 acre lot has a large shop with an appt in it. The vacation rental we are selling is owned by a single member LLC that is treated as a disregarded entity on our taxes. Would it be possible for us to purchase the house lot personally and have our LLC that owns our vacation rental purchase the lot with the shop/apartment through a 1031 exchange? The apartment would need some work but we would like to fix it up and Airbnb it so it would technically be a like kind property, but we would also store our RV in the shop. I know your personal residence can't be on the same property as the replacement property, but what about next door? If I'm understanding the exchange rules, we would need to purchase that lot separately for at least $523K to maximize the tax benefits and would we need to finance around $200K. The morgage requirement is the part I'm having trouble understanding. Paying around $500K for that lot and $900K for the house lot actually would be in the ballpark of how it could be split up, but I"m not sure how a bank would look at that. I know the cleaner way to do it would be to use the 1031 to buy another rental property and buy our house separately, but that's not going to be possible in the market we are looking at. This house just happened to be spit up into two lot coincidentally so I thought I'd ask around.

It's too bad we can't use the 1031 funds to pay down our mortgage in Portland since we are converting it to a rental and will put it under its own LLC. I'm guessing there is no way that could be structured that's not self-dealing;). Tell me if i'm wrong! We have a lot of moving parts in this transition, so any ideas are welcome!

Carl S.

Jerry W. · Answer

@Carl Schreiner, I second what @Chris Davidson said. I would absolutely contact @Dave Foster. He helped me on 2 different 1031s in the last year clear out in WY. Figure it out BEFORE you sell.

Dave Foster · Answer

@Carl Schreiner, I think you've got the requirements straight - you need to purchase at least as much as your net sale ($870K ish) and use all of the cash from the sale in the purchase of the new property ($670K ish). There is no specific requirement to take a mortgage. But you do have to purchase at least as much as you sell (to defer all tax). So most folks will take a mortgage. But you can use your own funds.

Here's an interesting angle for you to pursue - If that property is actually one property right now I would imagine you could get one primary residence loan for it right now. Why not do that and simply have your accountant carve out which ever part you want to be treated as investment for the 1031. It is perfectly fine to live in part of a property and use the other part for investment. People do this with duplexes , bed and breakfasts, and situations like yours all the time. So just get one loan and break out the property on your tax return.

You may look at using the new house for investment for a year or two before you move in as that would satisfy your reinvestment requirements. Meanwhile you could build out the other apt on the other land and live there for a bit. Or allocate three acres to investment and only the house on a small lot as your primary. There's room for a lot of creativity here to make your valuations work.

Chris Davidson · Answer

@Carl Schreiner to maximize the 1031 and not get penalized you will need to spend at least 870k or the sale price of your subject property. My understanding is if you are buying it for investment and it is real property it fits the bill. I don't see an issue with it being beside something you own considering that is going to be a rental as well.

Reach out to your intermediary, and if you don't have one get one and @Dave Foster is the best place to start.

Chris Davidson · Answer

@Carl Schreiner you won't be disappointed with McCall if you love the outdoors. Such a great little town.

Keep crushing it!

Carl Schreiner · Answer

Thanks for yoiur response Chris! I see that I was totally misunderstanding "equal or greater value". Thanks for the clarification. Good to hear it's a possibility. So I see you are in Boise? We are relocating to McCall. What a beautiful area! We also have a ranch in eastern Oregon in Union County. I guess we will be residents of Greater Idaho now:)

1031 replacement property on lot next to personal residence?

1031 replacement property on lot next to personal residence?

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