Can you 1031 into an FHA-financed property?

1031 Exchanges
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Can you 1031 into an FHA-financed property?

Leo B.
Investor · Hercules, CA · Member since 2015 · 208 posts · 47 votes

I'm liquidating a rental property and am considering 1031 exchanging a portion of the proceeds into either a SFH that I plan to live in one room and rent the other rooms, or a 2-4 unit property where I would live in 1 unit and rent out the remaining units. Is this possible? I'm trying to look at this from the tax audit perspective and the FHA lender's perspective.

Thanks in advance for your reply.

-Leo

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y

@Leo B. in theory this is no different than purchasing a duplex and using 1031 proceeds and living in one side.  But that's only in theory and there's a lot of demons lurking.  

For starters you're going to have to create strict allocations for depreciation tables and expense allocations and have a very forbearing and understanding accountant.  Remember you're going up against an IRS that doesn't like home offices anyways let alone what you're proposing.

Second, you will have to make sure that the purchase price of the new property is high enough to cover both the entire exchange with enough over that to equal the allocation of value for your live in portion.  You can't 1031 into your primary residence so this amount has to be over what your 1031 provides.

Third, you have to sure that FHA guidelines will allow you rental activity on a SFR that you also occupy.

Fourth you wouldn't want to forget any city/community regulations that could get you crosswise.  If your exchange were ever questioned and it was found that your house was in an area tor was rented in a way that was not allowed rental - guess what.  You didn't exchange into an investment property. Your exchange is toast.

All of this is a very gray area.  Because the house hacking phenomena is relatively new there is very little relevant guidance in case law.  

I think you'd be far better off doing what you planned but do not occupy part for a year or two. then you could move in and do what you want with the rest. Of course this queers the FHA loan but steers you clear of trouble on the 1031 front.

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  • Natalie KolodijBusiness Member
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    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    9y

    You can't 1031 into a primary home - it has to be an investment. 

    It may be able to be split where part is tax deferred and part isnt if a portion of the new property is a rental and a portion is primary? 

    @Bill Exeter @Dave Foster Can someone chime in?

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Leo B. in theory this is no different than purchasing a duplex and using 1031 proceeds and living in one side.  But that's only in theory and there's a lot of demons lurking.  

    For starters you're going to have to create strict allocations for depreciation tables and expense allocations and have a very forbearing and understanding accountant.  Remember you're going up against an IRS that doesn't like home offices anyways let alone what you're proposing.

    Second, you will have to make sure that the purchase price of the new property is high enough to cover both the entire exchange with enough over that to equal the allocation of value for your live in portion.  You can't 1031 into your primary residence so this amount has to be over what your 1031 provides.

    Third, you have to sure that FHA guidelines will allow you rental activity on a SFR that you also occupy.

    Fourth you wouldn't want to forget any city/community regulations that could get you crosswise.  If your exchange were ever questioned and it was found that your house was in an area tor was rented in a way that was not allowed rental - guess what.  You didn't exchange into an investment property. Your exchange is toast.

    All of this is a very gray area.  Because the house hacking phenomena is relatively new there is very little relevant guidance in case law.  

    I think you'd be far better off doing what you planned but do not occupy part for a year or two. then you could move in and do what you want with the rest. Of course this queers the FHA loan but steers you clear of trouble on the 1031 front.

    The 1031 Investor5137 Reviews
    WebsiteView Page
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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Leo B.:

    I'm liquidating a rental property and am considering 1031 exchanging a portion of the proceeds into either a SFH that I plan to live in one room and rent the other rooms, or a 2-4 unit property where I would live in 1 unit and rent out the remaining units. Is this possible? I'm trying to look at this from the tax audit perspective and the FHA lender's perspective.

    Hi Leo,

    Yes, it can be done, but you have to be very careful. The fair market value of the portion that is being held as rental property must be equal to or greater than the value of the rental property that you sold. You have to be very careful with your documentation and allocation of rental vs. primary usage, especially with the SFR.

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  • Leo B.
    OP
    Investor · Hercules, CA · Member since 2015 · 208 posts · 47 votes
    9y

    Thanks for the replies all. I think I will keep this less complicated and utilize all 1031 proceeds towards an investment property.

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