How to transition INTO a 1031 exchange?

Question

My Goal:

- Purchase a Multi family house in the DC area (inside of DC or in Virginia or Maryland)

My Situation:

- I own a Single Family Home, which is my primary residence, that I purchased in 2016. However, I have never lived in my home since I have been stationed in Europe for 5 years. Because I have NOT lived in my house IF I go to sell it right now I will pay capital gains tax. This is because I do not meet the IRS requierement of living in my home for 2 out of the last 5 years. As of December 1st 2021 my house will be paid off. Purchase price was $225K ... current value $475K-$500K.

Question:

- How do I convert my primary residence to an investment property to eventually do a 1031 Exchange and purchase a multi family?

Joe Norman · Answer

Your best bet is to contact a 1031 Intermediary to ask these questions as they are the professionals that will be involved in shepherding the exchange. Good luck!

Joe Splitrock · Answer

@Wojciech Grajewski you never lived in the property, so it was never a personal residence. If you rented the property, then you should have shown income and depreciation on your taxes for the last five years. Is that the case?

Wojciech Grajewski · Answer

I purchased the house with a VA loan in 2016. When I closed on the property the first thing I did was to gut it entirely and have been renovating it for 4 years. Renovations officially stopped end of 2020 and since early 2021 my cousin is living in it. Not sure if it answers your question.

Dave Foster · Answer

@Wojciech Grajewski, If you want to classify that property as an investment property then you simply need to treat it like an investment.  And your accountant will change where it is reported on your personal tax return.  Actual income production is not a requirement - but generating income is a  very strong indicator of your intent to hold it for investment.  So my best recommendation would be to rent it or make it available for rent and simply treat it like an investment.  Since you've never lived in it the bar to demonstrate your intent to hold for investment would be pretty low - even if your were keeping your options open to hold for investment or maybe move into one day.

Caveat - If you want to buy something in or near the beltway using the 1031 exchange you'll need to also purchase the new property with the intent to hold for investment use.  So you'll need to do that a year or so before you might change your mind and move in.  So it can be a change of use and not a purchase of your next primary residence.

Wojciech Grajewski · Answer

I'm a Government contractor and NOT a military member ...

Russell Brazil · Answer

Theres no conversion. It already is an investment property.

Military members on active duty have up to 10 years for a sale to exclude capital gains, far more time than the 2 out of the last 5 year requirement the general public has.

How to transition INTO a 1031 exchange?

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