1031 exchange to land that will become “B&B” type rental

2 Replies

I am not a real estate investor but my husband and I own a duplex worth about $300k with 100% equity that he’s owned for 25 years and a residence worth about $450k with 100% equity that we’ve owned for 18 years.  We want to ultimately sell both properties and put the combined amount into buying land that we will eventually build on and live on with cabin(s) to rent out.  We plan to live in our current residence until the new property has a house built, which could take us years to get done.  The tax implications of selling the duplex affect how much money we have to put into the new property.

What do we need to do to maintain eligibility for a 1031 exchange?  How do we determine how much the rental part of the property is worth versus the residence part when there is nothing there yet?   How soon must we start to generate rental income?  As soon as we move into the residence portion?   We are planning a very specialized service, catering to guests with certain environmental sensitivities, and are unsure how strong (or weak) the demand will be for our rental cabin(s) so we plan to start with just one rental cabin.  What happens if there is very little rental income?

@Jennifer Stanovich , Love the concept! I think this one is going to unwind for you as you go.   All you'll be doing is  selling a duplex for $200K and buying $300K of replacement investment property.  If the land is enough to absorb this then you're 1031 is complete and you can start building your vacation cabins done.  

If the land will not absorb the entire $300K then you'll need to look at doing a reverse exchange so that you can use your 1031 for some of the construction on the new property.  

By the time all is said and done, you'll have established your intent on the new property and can simply sell your primary tax free and move into your caretakers quarters.

I don't envision much 1031 issue for you if managed correctly.