1031 Exchange into Duplex to Owner Occupy.

[Christopher Theder]

I am attempting to house hack and move into a duplex to reduce our out of pocket per month. Should go from 1100-500. So I have a duplex I am actively selling. I have owned it for about 15yrs. Equity is about 60k. Would like to use if for money down. Capital Gain will be about 35k. Buy was 180k sell for 215ish. Depreciation of course is significant. So I would like to 1031 exchange it. I am considering 1031 exchanging it into another duplex, possibly SF (duplex prefered for out of pocket). I would then like to live in this new duplex next summer. After some research, sounds like you can utilize 1031 along with code 121, but the following was stated: Need to have it as a rental for 2 years first, then can live in and covert to the 121 code. Then the proportion of your differed taxes/depreciation payback is based on the ratio of years you live there compared to the 2 year requirement (as income property). Would this be different for a duplex (only living in one side) Partial savings? Any insights or suggestions?

Thanks

[Dave Foster]

@Christopher Theder, There's nothing wrong with this at all.  There's just some valuation calculation that needs to happen.  In order to defer all tax in your 1031 you must purchase at least as much as your net sale.  So for ease of example if you're selling a Duplex for $250K and want to 1031 it. you must purchase at least $250K of investment real estate.  If the new duplex is being purchased for $500K then you would need to take title to at least 50% of the property as investment.  The other unit you could move into immediately.  So if the two units are roughly identical the you're good to go.

You want to think of your replacement duplex as two distinct properties.  One is investment and one is your primary.  As long as the investment portion of the property equals your net 1031 sale then you'll have deferred all tax.

And not coincidentally this is how HUD views the purchase of a financed property of 4 units or less. You can get primary 3.5% down financing on properties you intend to occupy one unit and rent the rest - it is a combination of investment/primary residence.

So you've got a good plan.  Work on the valuations.  Maybe go for a tri or 4 plex if you need to carve it up a little more to make the valuations work.  And go for the cheap financing!!  Good plan.