Selling multiplexes and buying a vacation rental?

[Russ Draper]

I'm selling my multiplexes, and I had the idea to save the capital gains tax and instead purchase a SFH that would be a short-term vacation rental. I remember the 1031 code saying something had to be similar to what you sold, has anyone done something like this before? I see some consolidation posts, but they are all for larger buildings, I was thinking of something like a luxury SFH that could be rented out on VRBO or Airbnb or something.

Has anyone gone so far as to purchase a new SFH as their primary residence and rent out rooms or something? Trying to think of how to qualify for 1031 in this type of scenario also.

[Dave Foster]

@Russ Draper,  What you're talking about is really a multi step decision making process but yes it can absolutely be done.  

1. The definition of like kind for purposes of 1031 is your intent for the property you sell and the one your purchase must be to hold for productive use in business trade or investment.  Selling multi family to purchase a SF vacation rental is perfectly fine.  The key to completely avoiding tax is in the valuations.  In order to completely avoid all tax you must purchase at least as much as you sell.

2. You may use the Vacation rental for personal use.  However the use must be tempered with your actual use of the property for investment purposes.  There is no statutory rule on exactly how much personal use or type and amount of investment use you can have but there is a safe harbor ruling in Rev proc 2008-16 which lays out one scenario that, if you follow it's limits, the IRS will allow your exchange.  

3.  The solution to using the 1031 to purchase your next primary residence or retirement home is to use the 1031 to sell your multifamily investments and buy the SF rental.  Use that for investment for a period of time (there is again no statutory limit conservative wisdom recommends a year or two), and then change your mind and convert it to your primary residence  Changing the use does no trigger a recognition of gain and once you have lived in it for 2 out of the previous 5 year period and have owned the property for at least 5 years you can either continue to live in the property or sell it and take at least some of the gain tax free (it will be %allocated between qualifying, primary residence, and non-qualifying, investment use)

Hard and fixed guidelines are few but the practice is very prevalent and with good guidance and planning you can accomplish this or a variation very easily.