New Member: Seeking 1031 Exchange Advice for CA Rental to Puget Sound STRs

[Alex Frey]

Hi BiggerPockets community,

My wife and I are looking for advice on our next real estate move and would greatly appreciate your insights. In 2021, we purchased a home in Southern California from a family member for $1.1 million. Thanks to the intra-family sale, our property taxes are low, and the property’s current market value is around $2.2 million. Shortly after the purchase, my job relocated us to Dallas, TX, so we turned the CA home into a long-term rental. It’s in a desirable coastal location and rents quickly for $7,350 per month.We’re now considering a 1031 exchange to sell this property and acquire two properties in the Puget Sound area (Bainbridge or Whidbey Islands are top choices) where we both have family. Our plan is to purchase one property to use as a short-term rental initially and eventually convert it into our primary residence in a few years. The second property would be managed as a short-term rental long-term. I’m somewhat of a risk-taker, but with three kids and a stay-at-home wife, I want to minimize risk and ensure a solid plan. I’m about 10 years from retiring from my career and plan to focus on a few small businesses I’ve started, which I can run remotely. Here are my key questions for the community:

1. - Has anyone done a 1031 exchange from a long-term rental to multiple properties, including one intended for eventual personal use?
   - Any pitfalls or tax implications to watch for?
2. - Are Bainbridge or Whidbey Islands good markets for short-term rentals? Any insights on regulations, demand, or property management in those areas?
3. - How should we structure this to balance cash flow, appreciation potential, and stability, given our family situation and my upcoming retirement?
4. - Any tips for managing short-term rentals remotely, especially as we transition one into our primary residence?

Any advice, lessons learned, or strategies you’ve used in similar situations would be incredibly helpful. Thanks in advance for your input

Sincerely, 

Alex

[Dave Foster]

Thanks for that kind shout out @Bradley Buxton.  @Alex Frey, you're in great shape to do the 1031 exchange on that property.  In fact we need to parse through some dates because you  could be entitled to take some of that profit tax free.  And then defer the rest with the 1031 exchange.

If you lived in the property for 2 years before you moved you would get the first $500K of profit tax free (if married, $250K if single).  If you moved before 2 years you could take a prorated amount tax free since you relocated for a job related reason.

This is if you sell the property within 3 years of moving out. If you don't meet either of those hurdles then the 1031 exchange will still avoid all tax.  And there's nothing inherently difficult in going from one sale to multiple purchases.  We would call that a diversification exchange.  You want to be focused on your desired markets and types (since you can purchase any type of investment real estate).  So that the 45 day period doesn't sneak up on you.

Your qualified intermediary for the 1031 has to be in place before you close the sale of your old property.  So they will be the key resource guiding you through the process.