1031 Exchange on FHA property?

Question

I am selling a 2 family I had purchased with an FHA mortgage about 4 years ago. I lived in the property for 2 years but now its just an investment property. Am I able to still do a 1031 exchange when I sell it?

Dave Foster · Answer

@Claudia Fernandez, the only time a 5 year ownership is required is if the property is one that you originally purchased using a 1031 exchange.  all that is critical is that you owned and lived in the property for two out of the 5 years prior to selling it.  So the two years residency doesn't have to be continuous or the last use before selling.

Claudia Fernandez · Answer

Dave, what if I haven't owned the house for a full 5 years? Its going to be 5 years in August but I have lived in it for 2 years, does it still qualify or you need to meet BOTH requirements??

Claudia Fernandez · Answer

Oh wow I had no idea! I am in the process of contacting a CPA because I clearly don't know all my options. Thanks for shedding light on this!

Dave Foster · Answer

@Claudia Fernandez, Depending on when you moved out you don't need to do a 1031.  If you have lived in the house for 2 out of the previous 5 years you can take the first $250k (500K if married) in gain tax free using the sec 121 primary residence exclusion.

If you haven't lived in it or two out of the last five then you have certainly used it as investment long enough to qualify for 1031 treatment.  But I would explore your potential tax free opportunity first.

Zachary Curry · Answer

Yes. FHA does not constrict home owner limiting your ability to encumber the property. It merely limits your ability to use FHA products to facilitate investing. In fact you can have two FHA mortgages if you are forced to relocate for reasons other than work.

Also a 1031 exchange will be able to provide more detail.