House Hacking to 1031 exchange?

7 Replies

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?

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.

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.

Originally posted by @Dawn Vacek :

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.

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.

Medium exeter 1031 clr cntr bBill Exeter, Exeter 1031 Exchange Services, LLC | wexeter@exeterco.com | (619) 239‑3091 | http://www.Exeter1031.com

Originally posted by @Zachary Miller :

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?

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. 

Medium exeter 1031 clr cntr bBill Exeter, Exeter 1031 Exchange Services, LLC | wexeter@exeterco.com | (619) 239‑3091 | http://www.Exeter1031.com

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

didn't mean to step on any toes bill.  

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.