1031 exchange into an FHA 203K

[Shawn Evans]

Hi BP! I need your help. A family member is going to be selling an investment SFH, with the profit to be re-invested into a student housing SFH via 1031 exchange. Lord willing, my family is going to buy a SFH on an FHA 203K with the intention of rehabbing, owner occupying for 6-12 months, refinancing out of the FHA, moving into another place, renting out the rehabbed SFH to students, pulling equity out and Utilizing another FHA203k for a permanent place for my family. There are 2 goals: 1) plow the equity from the family investment property into something else for the 1031 tax deferment. 2) take advantage of the FHA 203K for the forced appreciation afforded by the rehab. Here’s where I need help: how can we best set up the SFH initially to meet both criteria? Does this family member need to be on title deed? Do we establish a notarized contract and nothing more?

[Christopher Phillips]

Shawn Evans

1031 can't be used for a personal residence, so putting into a 203k owner occupancy SFH is out.

[Shawn Evans]

Thanks Chris.

[Shawn Evans]

Could we plow the profits from the first investment property into funding platforms like Realtyshares, and still qualify for a 1031 exchange?

[Josiah Collins]

I could be wrong, but from my understanding of a 1031 exchange, there may be a way to make it qualify for a 1031. If you were to move out of that SFH and rent it out for a year it could then be considered an "investment property" and qualify for a 1031. The thing is you would have to live it in for at least a year, I think, as part of the FHA loan. Then have it rented for a year for it to reasonably be considered an investment. Not sure if that makes sense with your timeline, but I had a similar situation.

[Christopher Phillips]

@Shawn Evans

Not sure about Realtyshares. You can't exchange real property into shares, since they are not like kind. That would prevent an exchange into REITs.

However, it's possible to exchange into Umbrella Partnership Real Estate Investment Trusts upREITs. But it would be a one way transaction and you wouldn't be able to 1031 later on back into real estate.

I'm not sure where Realtyshares falls under those. I'm under the impression that it differs from a REIT since a person would be investing directly into real estate and not into shares of a corporation that manages a trust.

You would need to speak with a 1031 exchange organization or Realthyshares and get more information.

[Dave Foster]

@Josiah Collins, You're right, if the house were rented for a period of time it would then qualify for 1031 replacement property for the property being sold.  But I think there's also a related party issue with the family all being involved.  Unless there's a reason to go 203 K I'd look at a different funding mechanism.  Even going with private money rolled to new permanent financing would open the door to many more properties and more options for contractors and scope  and grade of improvements.

@Shawn Evans, your family member selling and doing the 1031 has to be able to take title to at least as much real estate as they sell and use all of the cash from the sale in the purchase.  And you don't want them buying from related parties.  So it would be best for them to be in on the purchase from the get go.  A twist to your strategy might be to buy the first one and fix and rent for a while as Josiah was suggesting.  And then convert it into a primary residence.