Purchasing a property I am renting with a 1031 exchange?

Question

1. I want to rent a house (that will be a rental) with acreage with an option to purchase. 2. I plan to then sell 2 pieces of investment real estate. 3. Then purchase the house and acreage with a 1031 exchange. I want to rent the property so that it will be available when my other properties are sold which will take some time. Will this arrangement meet 1031 requirements? Thanks

Dave Foster · Answer

Absolutely right @Bill Brandt ( on the ownership thing not me and weirdness :). @Warren Wright, You have to close the sale of your old properties before you can take title to the new property. But you can absolutely be leasing it with an option to purchase. Make sure it is a regular lease and that none of the lease payments are counted toward the purchase price. Or you start to muddy the water over whether or not you've already purchased it even though deed hasn't been transferred.

@Aaron Arnold is right that you can't use the 1031 for your primary residence. But as long as the allocation toward the land equals your reinvestment target you can purchase both as part of the 1031. Your accountant will allocate the %s so the primary residence and the land are treated differently.

Aaron Arnold · Answer

To qualify for a 1031 exchange, the properties you sell (relinquished properties) and the property you acquire (replacement property) must be held for investment purposes or used in a trade or business. Personal residences do not qualify.

Bill B. · Answer

Talk to @Dave Foster he’s a pro at the weird exchanges. The first big flag would be you need to not have any ownership rights. You can’t exchange in to something you own. Second as mentioned you probably would have to move out the day before and find a new tenant right away to avoid the appearance of buying a primary home.

Dave Foster · Answer

@Warren Wright, Yep. That would work just fine. I sent a colleague request if you wanted to dialogue further.

Warren Wright · Answer

Hello Dave Foster and contributors,

Thanks very much for your answer to my question. To clarify I have no intention of making the house or the acreage my primary or secondary residence. I am planning to rent a house with acreage until I can get the sale of the properties that I am going to exchange under contract. I am planning to purchase the house with acreage solely as an investment. The house to produce some income, the acreage to sell to a developer some time in the future. The key issue seems to be that I not have an ownership interest when I am renting the property. I am planning to sell a rental property and a building lot and have the 1031 intermediary use the proceeds to buy the replacement rental house with acreage. Does this scenario meet the 1031 rules? I hope this is clear. Thanks in advance for comments.

Purchasing a property I am renting with a 1031 exchange?

Purchasing a property I am renting with a 1031 exchange?

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