Tearing down house to build duplex. Can I do 1031 for Unit B?

Question

Hi everyone, looking for some insight on 1031 exchanges. Here's the scenario and facts.

I own a piece of property in Austin and have for more than 5 years. It is my homestead and I have lived in it for all five years. The property has $500K+ in equity. I plan to tear down the existing structure and build a duplex. Once completed I would like to retain Unit A as my homestead and sell Unit B. Do I need to hold Unit B for a certain period of time before doing a 1031 exchange? I understand many of the other IRS tax requirements associated with 1031 exchanges but this particular issue in unclear to me. I will, of course, talk to my CPA about this but curious to hear thoughts from people knowledgeable about this topic.

Dave Foster · Answer

@Chris Schorre, It's an interesting question because there may be more options than you realize. First there is no statutory holding period that would qualify Unit B to sell and 1031. The rule is that you must have acquired (constructed) unit B with the intent of holding for productive use. Most folks feel comfortable at anything more than a year (held as investment). But there could always be situations where a hold of less or more would be. appropriate.

On one hand the tear down and build create new inventory. and it would be up to you to have and be able to demonstrate the intent to hold for productive investment use. A build and sell without a very compelling reason to sell looks a lot like a fix n flip with the intent of resale not hold.

But on the other hand you have a primary residence that you have lived in for several years. I think it would be a very interesting question to put to your CPA. Ask them if you can sell Unit B as a primary residence sale. If so then you could take the profit associated with that portion of the property tax free. there's some precedence in the regs for splitting and selling a primary in stages. I'm not that versed in it. Your CPA should be. But that would be the bees knees if you could do that.

Otherwise, you'll want to examine intent and then sell and 1031 unit B when appropriate.

Chris Schorre · Answer

@Dave Foster thanks very much for sharing your insights.

Stephen Stokes · Answer

@Chris Schorre call the folks over at 1031 exchange corporation @ 512-419-1031 and ask them this question.

Aaron Gordy · Answer

@Chris Schorre Follow my buddy's Stephen's advice. Call the 1031 folks. If you need a direct contact with any of the folks there, let me know.

@Stephen Stokes

Marian Smith · Answer

seems like you'd sell b as homestead no capital gains tax and retain a as next homestead free to sell as homestead either immediately (not sure here as you may only be able to exclude gains once every 2-5 years, whichever is law) or in 2-5 years. I see it as remodeling your homestead prior to selling which does not require you to treat it as an investment unless you actually then rented it out, collected rent and depreciated on taxes. I remodeled my homestead prior to selling to get top dollar. I guess I could have subdivided my two acres and sold the house capital gains tax free and retained one acre. I am not an accountant so verify, but makes sense to me. dont think you need to 1031, expensive hassle.

Nina Hayden · Answer

I have also considered doing the same for one my properties. Huge lot and would like to build a couple units that are spacious enough with backyards and parking space. But one unit will go to family instead, so not my homestead. Have seen many that are done well! Def talk to an 1031 expert.

Tearing down house to build duplex. Can I do 1031 for Unit B?

Tearing down house to build duplex. Can I do 1031 for Unit B?

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