1031 Exchange towards a primary residence

3 Replies

My parents are selling multi-unit (10) apartments, which is part of an LLC. The LLC consists of my parents and a family member who recently passed away, and the property is fully paid off. When its sold, can the funds be use to pay off their current primary residence with a 1031 exchange, or can that money only be used towards the purchase of new properties?  My mother is retired, and my father still works (but would likely want to retire in the next few years, so cash flow w/ new rentals would be my recommendation vs. paying off the mortgage if that's an option). If you were in their shoes, any recommendations on what you would do with your portion of the sale?  Is seller financing an option to consider?

Also with the 45-day rule, that seems like a short amount of time to sell a property and buy a new one. Do most people just have to make quick buys after their property is sold? Any work arounds or tips to know for 1031 exchanges?

Greatly appreciate your advice!

@Stuart Powell

The exchange is not for residence payoff. I don’t believe that is an option. 

Get a 1031 intermediary. You have 6 months to purchase not 45 days. I believe you can get 3 months on identifying a place and 3 months to close. It goes by quick. 

You have some issues that you need an expert and also have your cpa tied in. LLC selling? LLC buying? Or is each individual taking their share? It makes a difference. It sounds like your trying to not pay long term capital gains taxes now and provide income in retirement.

Taxes could be less when dad retires and I’m not sure how much money is at stake. Look at doing the the 1031 for tax saving purposes. Maybe look into a private or public reit where your parents don’t have to work as hard in retirement. 

Hi Stuart. Your parents are definitely able do a 1031 exchange, but they can’t take the proceeds to pay off a residence. That would void the 1031 and make the whole thing taxable.

They could consider doing an exchange to a DST which is 1031 exchange eligible, but would provide managed real estate (completely hands off), but they still get the income off the DST along with the benefits of real estate (such as depreciation). They can also pass on DST interest to listed beneficiaries. I’m in the 1031/DST space and come across this scenario quite a bit.

Question: to whom did the ownership share of the LLC that passed away go to? All current owners would have to be in agreement to execute. Also, have your parents put something in their estate plan to make sure their LLC interest passes to whomever they want it to go to?

Also, you have 45 days to identify replacement property, but you have to close within 180 days total from date of sale of the old property. If you do an exchange, make sure to use a qualified intermediary (I can recommend one or two) and I’d also recommend listing more than one potential replacement property (can list up to 3 and it can be property you found as well as a DST or a combo of both).

Food for thought. Happy to help.

@Stuart Powell , As @Carl Fischer and @Joshua Wright both mentioned you cannot pay off property you own with a 1031.  However there could be a way for them to purchase a property using the 1031 exchange that they later convert to a primary residence in a few years when they fully retire.

But there's a huge hurdle first and that is that the LLC is actually the tax payer for the property they are selling. It must do the exchange. Since there were multiple members that LLCis a regarded entity. So it must sell and then purchase the new property. After that I'm guessing that the executor will either have your parents buy out the interest of the deceased according to the operating articles of the LLC or it will be dissolved and the assets distributed to the members (your parents and the estate/heirs).

Many of our clients have taken the opportunity of having some time to plan and have used a 1031 to purchase an investment property that they will convert later into a retirement residence.  It just takes a little patience.   And the best thing about that is that when they do that the proceeds from the sale of their current primary residence will be tax free.  And they will move into a property where the tax has been and will continue to be deferred indefinitely.