Suppose I sell my current investment property. I then use a 1031 exchange to purchase a duplex. Can I then live in one of the units as my personal residence?
yes but you need to come up with a reasonable allocation as to how much is personal and how much is business to split the two amounts to equal the one purchase price. Square footage is often used but if there is a lot of land or beach front view on the tenants view you can reasonably assign more value to them. There are a lot more details but that is the general idea
@Christopher Rogers , the answer is yes. Possibly sooner but definitely later. As the last post demonstrated you can do an allocation and if there is sufficient square footage (or ratio of purchase price etc) above your 1031 requirements you could move into that portion of the property as it is not needed to satisfy 1031.
Even if you are only purchasing just enough to satisfy the 1031 requirements there is no reason why you cannot change your mind in a while and move into the property thus converting it from a rental to part primary residence without triggering a gain recognition. There's some potential pitfalls and things you'll need to pay attention to but yes you can.
Yes, but you must be very, very careful. Here are some comments that will help clarify those comments made above.
There are certain requirements that must be met in order to qualify for tax-deferred exchange treatment under Section 1031 of the Internal Revenue Code. You must acquire a replacement property that is of equal or greater value than the one that you sold. You must reinvest all of your cash generated by the sale of your relinquished property (and held by your Qualified Intermediary). You must have the intent to hold the replacement property for rental, investment of business use purposes.
So, having said all of that, let's assume that you sold a rental property for $250,000 and you bought a duplex for $500,000. You reinvested all of your cash and financed the balance of the purchase. Let's also assume that the two units are exactly the same size based on square footage, so that 50% of the property will be held for rental purposes and 50% of the property will be used as your primary residence. In this case, you have traded equal in value (sold $250,000 and bought $250,000 in rental property value), you have reinvested all of your cash equity and you have the intent to rent 50% of the property out. You qualify for 1031 Exchange treatment.
If you sold for a rental property for $250,000 and bought a duplex for $250,000, then you would not qualify because 50% of the purchase or $125,000 would not replace your requirement values and you would recognize some or all of your taxes. You would have to rent the entire duplex out in order to qualify for 1031 Exchange treatment in this case. You could move into a one of the units after you have rented it out for a period of time, but remember that the requirement is that you have the intent to hold for rental purposes. If the IRS or state audit team could prove that you really had the intent to live in half all along they can disqualify your 1031 Exchange. Intent is important. Intent can change. It is all about what you can prove and document.
Thank you everyone for the replies. This is extremely helpful.
I am looking to sell my investment condo and purchase a duplex closer to my primary residence. It's been a great investment which I purchased with a 15 yr mortgage. After annual depreciation I was just about breaking even. So it's been a great start to my investing career. However, now, my strategy is to sell that property, and use the funds to purchase a duplex valued at double the current investment property's value, at a 30 yr mortgage, and be cash flow positive.
I also plan on selling my personal residence, taking advantage of the federal tax free gain after living here for 2 years, and living in the new investment duplex temporarily (1 to 3 months) until I purchase my next primary residence. The time line spans across 2016, so it'll take a while, but it is very exciting non the less.