1031 exchange to buy future primary home

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1031 exchange to buy future primary home

David Weymouth
Member since 2020 · 28 posts · 4 votes

I have sf rentals that have done quite well. I live out of state in a home that is larger than my wife and I need. We like the area and don't plan to move were the rentals are located. As I mentioned they exceeded my expectations and there will be considerable regular capital gains along with the recapture of the depreciation %25 tax. My question is if I have found a home near me that is a better fit for retirement could I do a 1031 exchange with one of my rentals and buy this other home and continue renting out it for a year or 2. Then sell my larger primary home and move into the rental and make that my new primary home. My thought pattern is that I would not have to pay any capital gains using the 1031. I hope this post makes sense and someone has the answer!

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
5y

@David Weymouth, With enough runway you can absolutely turn a 1031 into a primary residence.  A 1031 exchange must involve initially the sale of investment real estate and the purchase of investment real estate (and it can be any type and anywhere in the US or a couple of territories.  So, yes you can exchange between AZ and WA).  But you never have to keep the  use as investment forever.  Only long enough to establish that it was your intent to hold for investment. use.  

There is no statutory holding period.  There is a safe harbor from the IRS in Rev Proc 2008-16 at 2 years under a set of circumstances.  Many people feel comfortable at more than a year.  But the true standard is - long enough to establish your intent to hold for investment.

So your game plan is solid.  Sell in AZ.  Do a 1031 and buy in WA.  Use WA for investment for a year or two and then convert the property to your primary residence.  Changing the use of a property does not create a taxable event.  And you're using deferred tax to help buy your retirement home.  

A good plan we've had many clients execute over the years.

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  • Brad HammondBusiness Member
    Real Estate Agent · Portland, OR · Member since 2016 · 1k+ posts · 605 votes
    5y

    Hi David, I know there is a way to 1031 into a home that you rent out and eventually move into. I would research it a bit more or talk with a 1031 qualified intermediary about it but it is possible.  

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  • David Weymouth
    OP
    Member since 2020 · 28 posts · 4 votes
    5y

     Hi Brad, good advice. I have talked to a couple family members who do some investing and they have just decided just to pay the gains now and not kick the can down the road. Appreciate the response! Definitely more research required.

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  • Christopher Smith
    Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
    5y

    You might want to explore beyond the Federal rules any 1031 provisions unique to California. If you were ever to sell the 1031 property (the one converted to a primary residence) with deferred gain that traces back to the original California property exchanged for it they might try to assert taxing jurisdiction. 

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    5y
    Originally posted by @David Weymouth:

    I have sf rentals that have done quite well. I live out of state in a home that is larger than my wife and I need. We like the area and don't plan to move were the rentals are located. As I mentioned they exceeded my expectations and there will be considerable regular capital gains along with the recapture of the depreciation %25 tax. My question is if I have found a home near me that is a better fit for retirement could I do a 1031 exchange with one of my rentals and buy this other home and continue renting out it for a year or 2. Then sell my larger primary home and move into the rental and make that my new primary home. My thought pattern is that I would not have to pay any capital gains using the 1031. I hope this post makes sense and someone has the answer!

    Yes, if you use the exchanged property as rentals for at least two years, your 1031 exchange will not be challenged by IRS even if you convert the rental into a primary residence after that. 

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  • David Weymouth
    OP
    Member since 2020 · 28 posts · 4 votes
    5y

    After the first response, I realized I needed to seek a professional. I dug further and think it is possible. Would be fro Arizona to Washington state. Thanks!

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  • Alexander Szikla
    Real Estate Agent · New York City · Member since 2020 · 818 posts · 639 votes
    5y

    I would recommend you use FHA for your primary home. You will have a $250k capital gains exemption anyway upon sale ($500k if married).

    Use your 1031 money for another investment property. 

    This method stretches your equity much further. 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @David Weymouth, With enough runway you can absolutely turn a 1031 into a primary residence.  A 1031 exchange must involve initially the sale of investment real estate and the purchase of investment real estate (and it can be any type and anywhere in the US or a couple of territories.  So, yes you can exchange between AZ and WA).  But you never have to keep the  use as investment forever.  Only long enough to establish that it was your intent to hold for investment. use.  

    There is no statutory holding period.  There is a safe harbor from the IRS in Rev Proc 2008-16 at 2 years under a set of circumstances.  Many people feel comfortable at more than a year.  But the true standard is - long enough to establish your intent to hold for investment.

    So your game plan is solid.  Sell in AZ.  Do a 1031 and buy in WA.  Use WA for investment for a year or two and then convert the property to your primary residence.  Changing the use of a property does not create a taxable event.  And you're using deferred tax to help buy your retirement home.  

    A good plan we've had many clients execute over the years.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    1Reply
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