Do I qualify for a 1031?

Question

So I have a property in Denver, Colorado but I now live in Sacramento, California. I bought the property in 2014 as a primary residence but it has been a rental property since 2015. I lived in it for about 14 months before I had to move. Can I 1031 for something here in Sacramento so I can play landlord with local renter roommates? And secondly, should I? The condo has appreciated tremendously, I have over $100K of equity in the property and I positive cashflow $800 on the unit.

Dave Foster · Answer

@Brett Chaponot, Don't believe a word @Natalie Kolodij, and @Robert Hetsler say!!!  I learn something from them every week.  But thank you both for the kind words.  Yeah I think you certainly could 1031 if  you wanted to.

But, I do have another  thought on your situation.  You bought this property as a primary residence and then lived in it for 14 months until you "had to move"  to CA.  It just may be that you could qualify for a proration of the sec 121 primary residence exemption.  the general rule is that you must have lived in the property for 2 out of the previous 5 years.  But if your move was caused by a job or medical related reason you may be able to take a proration of the gain from the time you lived there tax free.  Since you lived in it for 14 months you could take up to 14/24ths of the $250/$500K exemption of gain tax free if your accountant agrees with you.   No need to do a 1031 and you can use the money for anything you want at any time you want with none of the restrictions of the 1031.  Food for thought!

Robert Hetsler · Answer

Hey Brett, let me ask you this, when you say "local renter roommates" does that mean that you intend to reside there but also have individuals/tenants living in the place with you?  The reason I ask is because I agree with @Natalie Kolodij  and @Dave Foster but if you are going to reside in a portion of the property, just make sure you have a solid methodology for arriving at the allocation of investment property compared to non investment property which could easily be a square footage calculation etc..  You just need some method to your madness and you also must be consistent going forward with respect to calculation of depreciation, interest expense if there is a mortgage (a portion could be an itemized expense on schedule A and the other could be a business expense on schedule E).

Additionally, remember that the taxpayer receives the benefit of the exchange so the seller, which could be you personally, an LLC, a Corp etc..,  must also be the purchaser of the replacement property.  The one quazi exception is if you owned the Denver property individually now but wanted to add a layer of asset protection, you could take title to the replacement property in an LLC as long as it is filed as a disregarded entity such that you would not secure an EIN specifically for the LLC and would continue to utilize your social security number.  I think it is form 8832 but you can easily confirm at www.irs.gov.

This is the only opportunity to engage in a name change while doing an exchange because the taxpayer's name is changing but the EIN, better known as the number the IRS scrutinizes, is the same.  An alternative way to accomplish similar results, in case you are financing the property, and the lender is not a fan of the LLC idea, is to simply purchase more liability insurance or an umbrella policy.  Further, I would require the tenants to carry renter's insurance because I have seen even the best of friends change when money entered the picture.   Make sure to have them sign a lease that includes them to provide a declaration page naming, you/legal entity owner, as an additional insured.  I have found that it is always best to hope for the best but plan for the worst!

However, @Dave Foster has a great point, why give up the great cash flow as it sounds like leveraging the property might generate more overall income.

Natalie Kolodij · Answer

I'd say you can.

There's no hard and fast rule on how long it has to be a rental- just showing that it's intent was to hold for investment purposes.

You chose to leave it as your primary, it's been an investment for about a year. Sounds pretty good to me.

@Dave Foster can you confirm/ add some insights?

OH jeez. I also just read the last sentence. $800 cash flow on a condo is fantastic. Are you sure you want to get rid of that cash cow??? Can you do a equity line for a down payment for a 2nd local rental?

Dave Foster · Answer

@Brett Chaponot, yep once every two years.

Natalie Kolodij · Answer

@Robert Hetsler his celebrity status comes with onslaughts of ridiculous questions from people like me. Be careful what you wish for ha

Robert Hetsler · Answer

Sorry, I just realized that @Dave Foster was not replying as it was actually @Natalie Kolodij and she is correct.

I have to figure out a way to gain the celebrity status @Dave Foster enjoys as he is certainly well respected in this Forum and it is well deserved for sure.  I was fortunate enough to meet Dave and his Wife and if you have ever met him in person, it is easy to see why he is so well received.  He is one big dude!

All joking aside, he is extremely knowledgeable and I have found that he provides consistent and very detailed responses.  He is very generous with his time and I believe that is why we all want to be like him when we grow up!  @Dave Foster you there?

Do I qualify for a 1031?

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