Can you house hack the replacement property of a 1031 Exchange?

Question

Hello BP Community,

I understand the terms of a 1031 exchange (you sell an investment property & roll over the capital gains into another investment property of equal, or greater value) My simple question is, can you house hack the replacement property of a 1031 exchange?

Vicki Sheil · Answer

You can close on the exchange and rent the property out for a year so it qualifies as an investment property and then move in to a unit which turns a portion of the property into your primary residence and the other portion is still rental property where you can take all of the write offs.

Dave Foster · Answer

@John Paziouros, There's all kinds of ways it can be done. Think Self storage facility with a managers quarters, or a Bed and Breakfast quarters for the owner, or one unit of a duplex. The key is to make sure that the amount you are using as investment is equal to the amount of investment real estate you sold. You don't even necessarily have to rent it all out for a year as @Vicki Sheil suggested as long as the units you use for investment are worth at least as much as the property you sold. Eg: If you sold a property for $100K . you could exchange that into a duplex for $200K and use 50% of it for personal use.

If you're simply renting out a couch or one bedroom of a central living space it wouldn't be prudent. first since you're living there you wont want to mess with the primary residence exemption. For another, without a clear demarcation of the primary/investment portion you would have a difficult time in an audit demonstrating that you were not using the 1031 property primarily for personal use

Can you house hack the replacement property of a 1031 Exchange?

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