House Hacking to 1031 exchange?

Question

Hey BP. I am new to the game and have been spending most of my time reading as much as possible here and have learned a ton. I am going to purchase a home soon and start house hacking. I am aware that with this, I will have to pay capital gains tax on the portion of the home that I rented out when I go to sell, while the portion of the home that served as my primary residence is excluded from that.

I had a idea that I didn't see anywhere, so I wasn't sure if it was possible or not. Is it possible to house hack and, when I go to sell the property, use a 1031 exchange on the portion of the property that was rented while using the capital gains exclusion of the portion that was my primary residence?

Joshua Chen · Answer

It's also possible to just keep the property and continue to rent it, pulling out cash from it with a refinance, which also allows you to avoid taxes at the same time.

Bill Exeter · Answer

Yes, you can do what we call a "split-use" 1031 Exchange.  The portion of the property used as your primary residence will qualify for tax-free treatment under Section 121 and the portion of your property used as a rental property will qualify for tax-deferred treatment under Section 1031.  In some cases, the tax-free treatment may cover the entire property if it is one unit with one common entrance.

Dawn Vacek · Answer

didn't mean to step on any toes bill.

Zachary Miller · Answer

@Bill Exeter thank you so much for that informative reply. I will be sure to read more into split-use 1031 exchanges.

Bill Exeter · Answer

Hi Dawn,

1031 Exchanges are not expensive at all.  1031 Exchange fees generally run $700.00 to $1,200.00 on the west coast, and sometimes as high as $1,800.00 on the east coast for a regular Forward 1031 Exchange.  They are very cost effective for any size 1031 Exchange transaction.

Zachary Miller · Answer

Dawn, thanks for your reply. You make very valid points with regards to the cost. The price range that I am looking at is around 300k, and I am hoping to rent out 2 or 3 rooms. I am not set on doing this by any means. I just want to be moderately knowledgeable on all potential exit strategies.

Dawn Vacek · Answer

Interesting question.  What is the price range you are talking about?  1031 is complicated and expensive and while the idea is good the reality my be that you are better off just paying tax and getting a clean basis on the next property.  Or why not rent out your unit, refinance for new cash to buy the next.  No tax on refis.

House Hacking to 1031 exchange?

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