1031 exchange old owner occupied home

9 Replies

I have a question about a future 1031 exchange my fellow BP's.

Currently live in a owner occupied 5% down conventional loan home. I’ve own the home for a year to date.

I want to buy a new home to do a live-in flip and repeat.

Can I turn my current home into a rental and then sale for a 1031 exchange?

@Hudson Walker , as long as you're not violating any lending terms it is perfectly fine to change the use of your property from primary residence to investment.  Once you've established that property as investment then you can sell and 1031.

BUT...... If you can be a little patient you can turn tax deferred into tax free.  Go buy your next live in flip whenever you want.  But don't live in until you have lived in the current house for two years.  Once you have done that you can sell it and take the first $250K ($500K if married) in profit tax free.  

Not trying to scare away business but Tax free is a whole lot better than tax deferred!!  And you can do this once every 2 years.  So you could move into your next live in flip and live there for 2 years and do it again.

Dave has the perfect answer again. If you have enough gains to make a 1031 exchange worth it, then wait a year and take the gains tax free. (Your live in flip example is exactly what people are doing. Living in it for 2 years while fixing it up and then flipping it tax free. Not living in while flipping then 1031 exchanging.  )

@Hudson Walker

Nope. It’s MUCH better than that. 

If you profit $260k you pay taxes on 10k. 

You get $250k of profit tax free (sales price minus sales costs minus purchase price) $500k if you’re married. 

That’s why we’re trying to sway you away from 1031

@Hudson Walker , Yep @Bill Brandt nailed it.  You get Profit tax free not just the net sale.   I will always accept a check if you insist but tax free is a better deal:)  

One my favorite clients is also a custom builder (if you substitute live in flipper here you'll get my point).  He always builds two houses at a time.  When they are done he moves into one and sells the other.  He pays ordinary income tax on the sale but generates living expenses and frees up the capital to build the next two.  Meanwhile he lives in the first one for two years.  When he sells he takes the cash from that sale tax free and moves into a brand new house he just finished.  That model is available to you very easily.

Even if you go ahead and reinvest you're still taking cash off the table and eliminating tax forever.

Originally posted by @Dave Foster :

@Hudson Walker , as long as you're not violating any lending terms it is perfectly fine to change the use of your property from primary residence to investment.  Once you've established that property as investment then you can sell and 1031.

BUT...... If you can be a little patient you can turn tax deferred into tax free.  Go buy your next live in flip whenever you want.  But don't live in until you have lived in the current house for two years.  Once you have done that you can sell it and take the first $250K ($500K if married) in profit tax free.  

Not trying to scare away business but Tax free is a whole lot better than tax deferred!!  And you can do this once every 2 years.  So you could move into your next live in flip and live there for 2 years and do it again.

I agree with Dave. I've done 1031's and much prefer to sell as a primary residence and cash out that equity rather then being forced to buy within a specific time line, replace a specific amount of debt, etc. as part of the 1031.

Originally posted by @Dave Foster :

@Hudson Walker , as long as you're not violating any lending terms it is perfectly fine to change the use of your property from primary residence to investment.  Once you've established that property as investment then you can sell and 1031.

BUT...... If you can be a little patient you can turn tax deferred into tax free.  Go buy your next live in flip whenever you want.  But don't live in until you have lived in the current house for two years.  Once you have done that you can sell it and take the first $250K ($500K if married) in profit tax free.  

Not trying to scare away business but Tax free is a whole lot better than tax deferred!!  And you can do this once every 2 years.  So you could move into your next live in flip and live there for 2 years and do it again.

I've heard it is best to wait until it's rented out for a full year before doing a 1031.

@Jack B. , Giving you a specific holding period is a lazy way for a QI to address the issue :)  Longer is certainly better.  But the standard is your intent.  If your intent is to hold the property for productive use then it qualifies for 1031.  There used to even be a mantra in the industry - one year and a day - because that ensured at least 365 days which turned ordinary income into capital gain and met the standards from three court cases - "two years", "two calendar years", and "two tax years".  Of course if you massage those three as many an attorney has you come up with a legitimate holding period of anywhere between 2 days (dec 31 - Jan 1) and 730 days.

So while longer is better there is no statutory holding period and there could always be circumstances where a hold period of shorter (or longer) would be appropriate.

Originally posted by @Dave Foster :

@Jack B., Giving you a specific holding period is a lazy way for a QI to address the issue :)  Longer is certainly better.  But the standard is your intent.  If your intent is to hold the property for productive use then it qualifies for 1031.  There used to even be a mantra in the industry - one year and a day - because that ensured at least 365 days which turned ordinary income into capital gain and met the standards from three court cases - "two years", "two calendar years", and "two tax years".  Of course if you massage those three as many an attorney has you come up with a legitimate holding period of anywhere between 2 days (dec 31 - Jan 1) and 730 days.

So while longer is better there is no statutory holding period and there could always be circumstances where a hold period of shorter (or longer) would be appropriate.

It wasn't my QI, it was an investment firm that manages billions in real estate DST's. I know there is no statutory requirement and that the IRS doesn't really give a lot of guidance on this, but what could it hurt to have it as a rental for a year before exchanging. I know for me unless I absolutely had to sell it right away via 1031, I'd rather hold for a year then sell just to reduce the risk of questioning my return. I try not to invite the man into my life or give them any reason to give me extra scrutiny.