1031 condo to 2 unit and live in one?

Question

I’m selling a rental condo and looking for replacement property. I found a single family home with an in-law that would be great for us as a primary residence. Is there a strategy that would make it possible to 1031 into this, making the in-law portion my 1031 rental replacement and the main house my primary residence?

My existing primary residence would then become a rental.

Bill B. · Answer

As long as the rental part of the property is worth as much or more than you net from selling your property. Imagine the 2 buildings are 2 separate properties. If the rental portion would qualify as a stand alone property you’re fine.

Dave Foster · Answer

@Maria D., It's got to be an allocation of the asset itself.  Square footage is common.  But there could be other factors that would give more weight to one area over the other.  Like extra bathrooms or location or finish.  There's not a prescribed method for your accountant to use.  But sq/ft is the most common.

So using that the investment side of the replacement property would need to be worth $500K or be 55% of the new property. That would mean that 55% or 2200 sq ft of the new place would need to be investment.

So I think you got an issue there.  But there could still be a way to skin that cat.

600 sq ft out of 4000 is 15%.  Which in dollars as a % of the sale would be $75000.

So you could purchase this place using $75k of the 1031 from the condo and still move in to the rest of the property.  You then would need to find more investment property worth $425K to satisfy the rest of the 1031 exchange.

Or you could use the proceeds from the sale of the condo and buy the house.  And use it entirely for investment for a year or so.  And then move in after - converting the main portion from investment to primary residence and  keeping the MIL part as rental.  This might not be a bad scenario since it sounds like you're OK with your primary now.

Since the allocation by square footage of the investment side is actually 600 out of 4000

Maria D'Aura · Answer

@Dave Foster

So how is the allocation determined? Is it sqft or amount of rental income?

Here’s my example:

600 sqft Condo sells for $500k

I buy a 4000 sqft house (600sqft is in-law/rental)

For $900k

Thanks for the help.

Dave Foster · Answer

@Maria D., exactly right by @Bill Brandt.  This is what would be called a split use property - part primary residence and part investment.  You'll want to be careful with the allocations to make sure the investment portion can cover the reinvestment requirements for the sale of the condo.  And you'll want to make sure your accountant places the investment portion on your Schedule E to replace the condo.

This can be a great strategy as it not only lets you increase your investment portfolio.  It also will allow you down the road to sell the property and take the gain from the primary residence side tax free if you qualify.  While you can 1031 the investment portion again.

1031 condo to 2 unit and live in one?

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