1031 Primary Residence for a Multifamily

18 Replies

Hello BP!

Has anyone have any success stories about 1031-ing their primary residence into a multifamily investment? Is this possible? 

It’s unnecessary.

The rules are a bit different with the new tax law changes but still basically the same as what I’m about to tell you. So verify with your CPA...

Prior to the new tax plan as long as you lived in your home 2 of the previous 5 years you could sell it and pay no capital gains on the profit. A single person could shelter up to $250k in profits and a married couple up to $500k.

The changes just in the time parameters....I think it’s like 3 of the last 7 or something now. Either way...I’m not a CPA so always verify.

A 1031 is tricky...don’t put yourself through that unless it’s necessary.

@Bryan Pham

I am not an attorney or CPA but you cannot 1031 exchange your primary residence as far as I know but I did not look a the new tax code around this so for 2018 it is possible. However if your primary residence ceases to be your residence and becomes an investment you can. The homestead exemption was not changed with the new 2018 guidelines so if you have lived in your home 2 of the last 5 years why would you need a 1031. Even if you have not lived in your home 2 of the last 5 years there are many banks that will allow you to HELOC up to 100% so you could just use those funds for a downpayment on a multifamily. 1031 exchange is a great tool, but I can't really see when a 1031 on your primary residence would be beneficial unless it ceased to be your personal residence.

Can't do it. Convert your primary to a rental first. Then sell it and take advantage of the $250k (single) /$500k (married) 121 exclusion as well (which is even better than 1031 in that your gain is tax-free not merely tax-deferred) as well as 1031 if your gain is in excess of $250k/$500k.

Thanks everyone for their feedback! What I meant to say was converting my primary residence into a rental property and then 1031 into a multifamily. 

@Bryan Pham , Now that dog will hunt!  

What you're really speculating on is the advantage of keeping the house in your portfolio for an additional 3 years.  Since you qualify for the 121 exemption after being there 2 years that is the best you will get from a tax mitigation perspective.  the gain up to the limits is tax free.

But by holding an additional 3 years you possibly reap appreciation, cash flow, and depreciation from an asset newly placed into service.  Not bad stuff.

Here's the counterpoint - SF homes that are/were your primary residence many times do not make the best rentals from a ROI perspective or a dollar/sq ft perspective. The likely market for a SF home is an owner occupant so there is likely to be some expense to make the property sale ready at the end of the term. And there's always market risk that appreciation will not occur.

So the big question would be where is the nexus of MF properties now with your available equity and where do you project it to be in three years.  If both appreciate comparably then you might not be better off waiting - take the tax free profit and buy a MF or whatever.

@Dave Foster

Thanks Dave, you definitely put a lot of things into perspective for me. I am looking to use the equity in my property to purchase a MF in the South. I find that some places in Tennessee and Florida cash flow super well, the thing for me right now is that I want the cash flow to be able to replace my income and give me financial freedom. In your opinion (and this is an age old debate) what do you feel is most important for a 1031 exchange? Cash flow or appreciation? 

@Bryan Pham , Yes.  I want it all.  What can I say!

Longer term holds on a 1031 generally make appreciation a more significant part of the equation.  But As depreciation winds down cash flow to justify holding the asset even without depreciation benefit becomes a very significant component.

Have you looked into REITS? There are some great programs out there with very large institutions that will offer you access into their portfolio.  I know of quite a few.

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@Bryan Pham  A good solution for you might be to use a Monetized Installment Sale. As everyone has stated, you cannot do a 1031 Exchange with a personal residence. However, you can do a Monetized Installment Sale. This would allow you to defer the taxes on the sale of your personal residence. In a monetized installment sale you defer the taxes by selling on an installment contract (seller financing) through an intermediary. The monetization loan lets you walk away from the closing with cash that can be used for any purpose. You don't HAVE to get back into real estate right now. Lots of CA sellers are deferring their capital gains using this planning approach.

Originally posted by @Johnny Borrelli :

Have you looked into REITS? There are some great programs out there with very large institutions that will offer you access into their portfolio.  I know of quite a few.

Johnny yo can't 1031 into a REIT the IRS doesn't recognize it as like kind. A DST however, you can.

That’s correct. A dst you can. The process may not be a 1031. Bryan if you are trying to shelter capital gains from his real estate sale. My firm does it, and when tou exchange you can own reits, or have the money invested however you like. As long as stays in the trust, it will not be taxed. Only distributions from the trust are taxed. Whatever remains undistributed remains tax deferred.

Can your primary residence qualify as an investment property as well if you rent out the majority of the property? I.e 4 bedroom SFR, 3 rooms rented and the other is primary.
617-642-6623

@Kevin Phu , Yes it can but you'll want to have some very good documentation and really be on the same page as your accountant.  It's no different than declaring a certain amount of square footage as a home office.  The income needs to be declared and depreciation taken and expenses allocated.

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