1031 exchanges on SFH???

Question

Can you do a 1031 exchange on a SFH or is this just for multi-family (triplex, duplex?)

Dave Foster · Answer

No problem Vince.  Happy Hunting!  By the way, just to complete the loop, I didn't get the impression that this SFH is your primary residence.  But if it is then the treatment offered by the IRS is much more advantageous.  Sec 121 allows  you to sell a property that you have lived in as your primary residence for 24 out of  the previous 60 months and take the first $250K in gain ($500K if your married) tax free - no need to exchange - just tax free.  And you can do this once every two years.

So whether your SFH is a rental or your primary residence there is a way to deal with the sale tax advantaged using either the 1031 exchange or the primary residence exclusion.

And what's double advantageous is that these two sections can be used together to turn the tax-deferred treatment of 1031 exchange into the tax free sale of a primary residence.  The way the process works is you would sell your current SF rental and use a 1031 exchange to purchase another investment property of some kind.  That process is tax-deferred.  In a couple of years or so you decide to change the use of that property from rental into your primary residence.  The IRS is concerned that your intent when you purchase 1031 property is to hold it for productive use.  But the IRS does not require you to keep the same intent forever.

So after a couple of years you move into that property and what was once an investment property is now your primary residence.  Now the same rules of sec 121 apply with two other requirements because the property was once a 1031 property.  You must live in it for 24 out of the previous 60 months.  AND you must have owned the property for a minimum of 5 years and you can sell it and take the same $250k/$500/K in gain tax free.  The only additional caveat to this is that when you do this you will have to recapture any depreciation taken on the property while it was in service.

Just another option as you build your portfolio to start you planning to not just defer but eliminate taxes on your real estate portfolio.

Bill Exeter · Answer

Hi Vince,

Let me help simplify that for you.

Like-Kind Real Property

The following list represents real estate that will qualify as like-kind property for 1031 Exchange purposes as long as all of the properties sold and bought are held for rental, investment or use in a business:

• Single Family Residential Property
• Multi-Family Property (Apartments)
• Commercial Office Properties
• Retail Shopping Properties
• Industrial Warehouse Properties
• Triple Net Lease (Net Lease or NNN) Investment Properties
• Agricultural (Farm) Properties
• Vacant Undeveloped Land
• Oil & Gas Interests
• Mineral Rights
• Water Rights
• Air Rights
• Easements in perpetuity
• Leases with a remaining life, including options, of 30 years or more
• Tenant-In-Common "TIC" Investment Property Interests
• Delaware Statutory Trusts "DSTs" Investment Property Interests
• Vacation rental properties (income producing)
• Beneficial interests in Land Trust that own real estate

You can 1031 Exchange between all/any of these and qualify for 1031 Exchange treatment.

Dave Foster · Answer

Hi Vince,

Great question and one that has been around for a long time.  Sec. 1031 allows you to sell property, both real and personal that has has been held "for productive use in business, trade, or for investment" and subsequently purchase property that it is your intent to also use for "productive use in business, trade, or for investment.  The rules for real property are quite broad and any type of real estate that is used for business trade or for investment may be exchanged for another type of real estate that is used for business trade or for investment regardless of type.  The use is the key.  A SFH that is rented or held for rent may be exchanged for another or for a MF or commercial or any other kind of real estate including raw land as long as ithe property is held for qualifying use  So the answer to your question on type of real estate is yes - Single family homes may be used in a 1031 exchange.

Where investors sometimes get tripped up is when they act as "dealers" and hold property primarily as inventory.  This is perceived by the IRS to be different than "productive use".  Fix N flip folks fall into this category.  Their intent is to hold the property only as inventory not for productive use so they cannot do 1031 exchanges on that property.  There are many ways to establish your intent and actual use. But in general if you are an investor whose practice and intent is to hold property you may sell that property and purchase other property using 1031 exchanges.

Elizabeth Colegrove · Answer

Yup totally possible. I did an exchange for family last year. Turned a townhouse into 3 single family homes across the country.

Vince Williams · Answer

@Dave Foster thanks that helps me figure out some things and gives me some additional options with a SFH of mine.

1031 exchanges on SFH???

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