1031 exchange duplex to single family

Rental Property Investor · Denver, CO · Member since 2013 · 33 posts · 12 votes

Hello BP,

Hoping some of you experts could weigh in on this one or point me to where it's been asked before on the forums.

I have rental property that I'm planning on 1031x this year. I'm aware of the rules for finding like properties, 45 days, etc.

Here's the catch, I'm also looking to purchase a SFR near the beach and wondered the following: Could I 1031 my current MF units (duplex) into a SFR to be used in the short term as rental property. Then when the time allows (2-3 years down the road) move into the SFR as a personal residence? Would this trigger tax liability at this point? Would I need to refinance?

I'm not trying to do anything illegal, it just seems like as long as I don't want to change the loan terms I'm basically 'renting' to myself?

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Dave FosterBusiness Member

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

@Kyle Smith, What you're talking about is a conversion of an investment property into your primary residence. Not illegal. Happens all the time. Change of use does not trigger a tax event. There's no statutory holding period before you can move in. But as @Matt K.said your intent in 1031ing into that property must be to hold for investment use. Later your intent can change.

The IRS gives a safe harbor for this of 2 years. A lot of folks are comfortable with over one year so it is on two consecutive tax returns as investment. The specifics of your situation will determine what's appropriate.

A couple of things to know about a conversion of a 1031 investment into your primary residence.

1. When you do sell, in order to get part of the gain tax free you have to have owned the property for a minimum of 5 years.

2. You will have to have lived in the property for 2 out of the 5 years prior to sale.

3. You will only get to allocate the gain between actual time of personal residence (qualified use) and actual time as investment property (non-qualified use). So if you bought it and rented it for 2 years and then lived in it for 3 years you would get 3/5ths of the gain tax free up to the exclusion limits.

4. You will have to recapture depreciation taken.

Other than those stumbling blocks it's a good plan and one that many have chosen.

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Matt K.
Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
8y
Pretty sure this comes down to intent, I don't think there's exact deadlines for this.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Kyle Smith, What you're talking about is a conversion of an investment property into your primary residence. Not illegal. Happens all the time. Change of use does not trigger a tax event. There's no statutory holding period before you can move in. But as @Matt K.said your intent in 1031ing into that property must be to hold for investment use. Later your intent can change.
The IRS gives a safe harbor for this of 2 years. A lot of folks are comfortable with over one year so it is on two consecutive tax returns as investment. The specifics of your situation will determine what's appropriate.
A couple of things to know about a conversion of a 1031 investment into your primary residence.
1. When you do sell, in order to get part of the gain tax free you have to have owned the property for a minimum of 5 years.
2. You will have to have lived in the property for 2 out of the 5 years prior to sale.
3. You will only get to allocate the gain between actual time of personal residence (qualified use) and actual time as investment property (non-qualified use). So if you bought it and rented it for 2 years and then lived in it for 3 years you would get 3/5ths of the gain tax free up to the exclusion limits.
4. You will have to recapture depreciation taken.
Other than those stumbling blocks it's a good plan and one that many have chosen.
The 1031 Investor5140 Reviews
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Kyle Smith
OP
Rental Property Investor · Denver, CO · Member since 2013 · 33 posts · 12 votes
8y
@Dave Foster - Thanks for your knowledge, you cleared up a lot. Last couple of questions; any issues in regards to Duplex-->SFR for a 1031? When my intent changes could I refinance into a lower interest owner occ loan without tax penalty?
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Jackson Hanssen
Property Manager · Tempe, AZ · Member since 2016 · 8 posts · 1 vote
8y
Yeah you're fine. you have reasonable time, but you should get an accountant for documentation
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Grant Rothenburger
Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes
8y
@Kyle Smith I've been seeing @Dave Foster comment on threads here on BP, always with great value on 1031 exchanges. I'm starting to think he knows a thing or two about it! I'd pay attention to his advice for sure.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Grant Rothenburger, thanks for the shout out LOL. My wife just says I'm so old I must have learned something along the way!
@Kyle Smith, You can refinance the day after you finish your 1031. It does not matter from the 1031 side. So if you found a more advantageous product you could use it immediately. But to go to an owner occupant loan you'll want to move in first. Otherwise you're either lying to the IRS or the lender. I'm pretty sure there aren't any lenders out there with nuclear weapons but you never know.
The 1031 Investor5140 Reviews
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Kyle Smith
OP
Rental Property Investor · Denver, CO · Member since 2013 · 33 posts · 12 votes
8y
@Dave Foster - Thanks for the info! My plan would be to leave the non-ooc loan in place until my intent changes, then move in and refinance to a lower interest rate loan at that point (I'm assuming a non owner occ loan would have higher interest rates, but I could be wrong).
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Jay Helms
Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes
8y
I'm currently going through a 1031x myself @Kyle Smith and I believe the answer is yes, as long as it is not a personal home (homestead). For clarity, I would reach out to your Certified Exchange Specialist (who you need to be conversing with anyway) to grab the real answer and understand all the timelines of when he/she needs your 1031x paperwork, what to do week of closing, etc.
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