1031 single family to multi unit? timeline?

13 Replies

I am selling a single family home, that i have bought and fixed up over 14 months.  did not live there.  i would like to buy a multi unit (4) and roll the money into that.  just found out we may be closing tomorrow..    am i too late?   Waiting to here back.   I am ready to buy a new place next week, is that possible with 1031?  I am looking at $5k in taxes.   

As long as you get it in place before you close on the first property you should be ok. The proceeds cannot come to you, but must pass through to a 1031 mediator.

Actually, assuming it was a fix and flip, you don't qualify for a 1031, regardless of the 14 months.

@Andrew Bosworth There are some peculiar wordings and interpretations for what properties can and cannot be given 1031 treatment.  They are fuzzy and come down to your intent.  If your intent when you purchased a property was primarily to resell it then you may not do a 1031 on it.  In order to be eligible for a 1031 you must have purchased the property to ...."Hold for productive use in business, trade, or for investment".

In the above example it is unclear whether @Dave K. bought the property primarily to fix and sell (not 1031able) or to hold but then changed his mind and decided to sell.  There is no statutory holding period.  Only intent as it is established.

very easy.  Did you collect actual rent and can show proof to irs if needed ?  Did you depreciate the house as a rental?  If not, no 1031.

I do flipping and land lording.  Apples and oranges and different tax treatment.  Only way to semi-legitimately combine is to truly rent property A for a year plus before selling to acquire next in a 1031.  Basically a fix-rent-flip via 1031.  Slower process.

Even then... If you do too much of it there is risk irs will consider you a dealer/flipper and not a landlord investor.  

but you are over a 1 year hold...so regular taxes don't apply.  Long term capital gain. Not bad at all!

Originally posted by @John Barnette :

very easy.  Did you collect actual rent and can show proof to irs if needed ?  Did you depreciate the house as a rental?  If not, no 1031.

I do flipping and land lording.  Apples and oranges and different tax treatment.  Only way to semi-legitimately combine is to truly rent property A for a year plus before selling to acquire next in a 1031.  Basically a fix-rent-flip via 1031.  Slower process.

Even then... If you do too much of it there is risk irs will consider you a dealer/flipper and not a landlord investor.  

Hi John,

The important point is your intent.  You can rent the property out for one year and a day, but if your intent was to buy/rehab and then sell, it would still not qualify for exchange treatment.  You must be careful to document that your intent was to buy, rehab and then hold as a rental in order to qualify.  Documentation will go a long way in proving your intent to hold such as correspondence/emails between you and your  advisors about your plans to hold for investment.  Documentation that shows you actually had the intent to  buy/rehab/sell will result in a disqualified exchange.

@Bill Exeter  

Thanks for this Bill. So basically the same would apply for a "second home" you bought and fixed up even if in the back of your mind you intended to rent it out after a year. 

You still need to change the status and actually rent it out for a year before becoming 1031 eligible? At what point does the intent need to be clear and yet not not effect the loan process if you did say you were flipping? Is there any other way Dave can avoid those taxes or is that just the name of the selling game going from one type of property to then next? 

Thanks! 

Yes.  Intent can certainly change, but you have to be very careful to document the change so that you can support the change if you get audited.  The key is what was your intent.  Was it to use the property as a second home or was it to be held as rental?  It is the true intent that matters - not necessarily what it "looks" like. 

The intent should always be clear unless you want to have a difficult audit.  For example, putting down that the property will be a primary residence or a second home on a loan application in order to get a better loan rate will not jeopardize your intent to hold for rental or investment purposes if that is your intent.  However, the loan application is one document that can be used against you in combination with other documents and/or correspondence to show that you did not intend to hold for rental/investment purposes.  The more "smoking gun" documents like a loan application the more risk you are taking that an auditor would not agree with your position that you did in fact have the intent to hold for rental/investment purposes. 

Dave's intent was to buy, rehab and then sell, so unless he takes time to demonstrate that his intent has changed to hold for rental/investment he is stuck paying the taxes.  And, even though he held for more than 12 months, it would not be capital  gain taxes if his intent was to rehab/flip/sell.  If I bought to rehab and then sell and then I decided to change my strategy to buy and hold as a rental, I would be more conservative and rent for at least 24 months (just my conservative opinion) in order to help demonstrate the change in my intent.  Email correspondence between advisors can also be a big help in demonstrating intent to hold.

Hi Bill,

I do not believe one of the original questions was answered. Can you do a 1031 exchange from a SFR to a multi-family?

@Andy Mortensen , use not type is the determining factor in eligibility for 1031. Any real estate purchased with the intent of holding for productive use may be exchanged for any other kind of real estate that it is your intent to hold for productive use. SFR to MF is perfectly fine.

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