Newbie house hack advice

8 Replies

Hi, I have a unique situation and would appreciate some advice.

I have been renting a house in Idaho for the last two years with an option to buy house for 151k at anytime within the next three years.

My realtor thinks the house should sell for 230k.

My goal is to house hack with a duplex.

My questions are: 1. Can I somehow buy the house with no money down at 151k (I don’t have enough savings for down payment, closing costs, etc)

2. After buying it can I use equity to pay for a 1041 exchange into a duplex valued at 230k, thereby keeping my 151k morgage.

3. If not can I sell it with no capital gains tax because it was my primary residence for the last two years while renting (not owning). Then use the gains as a down payment on a duplex.

Appreciate any advice or ideas anyone may have.

@David AscheSounds like you've got a great situation. I would definitely take the option to buy and hopefully you can find a bank that would count the equity value as your down payment to not need any money out of pocket. But instead of selling to 1031 you can either with the purchase/refi, possibly pull some money out at that time to use and therefore also keep that house to live in while you search for something and then keep it to rent out as well. Or buy the house and then get a heloc on the equity value to use that to purchase another property. I am not a CPA or attorney but I would suspect that since you did not buy it, two year ago, even though it is your residence you did not own it and therefore it you buy it and then sell it, you would not get the favorable tax treatment.

@Don Spafford thanks! I did consider renting the house and looking for another property. My problem is that the market is so high here in Boise it’s hard to find something I can afford with the down payment from the equity. I would prefer to exchange so I can still have two units (one for me, one to rent) and only have one loan, vs two house loans. And I don’t want to do long distance land-lording for my first unit.

Is there a disadvantage with a 1031 I’m not seeing. Can I do it with a primary residence.

The one-stop-shop for REI
Find Local Home Improvement Pros!
Check out our network of trusted, local contractors for all of your home improvement projects.
Find a Contractor

A 1031 needs to be a like-kind exchange. You should verify with a CPA or a 1031 exchange expert. But since it was your primary residence, not an investment property, although you could argue at the moment you buy it, it was for investment purposes and therefore is an investment property, and then if you buy a small MF even though you will live in one unit, it still is an investment property, so logically it kind of makes sense that you can, but I really don't know. The safest bet would be to purchase, then live in it for one more year and then you can potentially sell at that point and not need to worry about the 1031 exchange rules. Technically you need to stay for 2 years to not pay any taxes as a personal sale, but again, check with a CPA since you did live in it and signed a lease option to buy, it may be a loophole there.

@David Asche,  The property will not qualify for the primary residence exemption because you must have owned and llived in it for 2 out of the 5 years prior to sale.

What you're describing will not qualify for a 1031 exchange because you are not purchasing the property to hold for investment use.  If you kept it as a rental for a while it would.  But to purchase it as a primary residence would not qualify.  And to purchase it primarily to resell would not qualify.

@Dave Foster thanks, that’s good to know. What if the current owner did the 1031 into a duplex and then sold to me under my opinion to buy. Would that pose a problem? What do you think?

Does the owner own the property free and clear?  Maybe you can work out a seller financing deal.  

@David Asche,  He can certainly sell the property and do a 1031 into another property.  It sounds like your option is to purchase that first property.  So I suppose you could release your option on it in exchange for an option to purchase his replacement property (in other words you don't want the property you've got an option on but you can hold him up because he has a buyer now.  So you're willing to let him sell if you can use and have an option on the new property).  

And then you could exercise your option to purchase that replacement property.  He'll pay taxes on the profit.  You'll get the property to use how you want.  But on your side you'll still have to own and live in it for two years to get the primary benefit.  And you'll have to own it long enough to establish your intent to hold for investment before you could sell and do a 1031.

It's a very interesting scenario.