1031 a multifamily u live/d in?

7 Replies

I just recalled that when in NYC i needed(?) to use an attorney to close on my long-term multifam flip (usually at 2 yrs owned/lived in) and usually the first words out of lawyers mouth was 'why don't u do a 1031 even exchange?' or something like that.

i never really paid attention to the particulars as to what and what can't be 1031, despite being in RE for a decade. or, i keep forgetting and too lazy to refresh.

 so what is it, i forget.. it has to be an investment property and can't be your primary residence? 

Your primary residence will not qualify for a 1031. The property must be held for investment. You will have to convert it to investment first. Speak w a 1031 specialist about how long to hold for investment before completing the 1031 exchange but two years or at a minimum two tax periods (one year and one day) is a good rule of thumb.

Assuming you lived there for 2 years the tax treatment is more generous for your primary residence than it is for an investment property.  You won't owe anything on the gains if it is less than 250K and you didn't rent the property out.  This is a better deal than the 1031 which will defer the taxes on the gains.

I think the structure of the deal would be to treat your unit as a sale of your primary residence and the rest of the units would be in a 1031 exchange.  This would give you a little bit of flexibility in the property that you acquire since you could pull out the proceeds from your unit without a tax impact - however you need to make sure that all proceeds - cash and paid off mortgages stay in the exchange and are used to acquire the next property.

I would start off with an accountant who specializes in Real Estate taxes and then go to a lawyer to implement the 1031.  

Hi Neil,

It is a tax-deferred strategy that allows you to sell your current multifamily property and defer the payment of your capital gain taxes, depreciation recapture taxes and avoid the Medicare Surcharge taxes if you reinvest in one or more replacement properties via a 1031 Exchange transaction.

You must have the intent to hold for rental or investment purposes.  Flips do not qualify, so be careful when you say long-term flip.  Properties bought for rehab/flip are held for sale (as opposed to held for investment) and do not qualify for 1031 Exchange treatment. 

Account Closed

The primary residence exclusion is more generous. If you have lived in a property you own for 2 out of the previous 5 year period you can sell it and take the first 250K in profit tax free.  It is 500K if you are marred. 

 However, because of the mixed use of your properties you have the opportunity to take both the sec 121 exclusion and do a sec 1031 exchange on the rest.  Your acct should have allocated the property between personal and investment use.  You can use an attorney experienced in 1031 exchanges if they are an unrelated party to you by business or blood relationship.  There are numbers of specialized qualified intermediary firms for 1031 exchanges as well.

Originally posted by @Dave Foster :

@Neil G.

The primary residence exclusion is more generous. If you have lived in a property you own for 2 out of the previous 5 year period you can sell it and take the first 250K in profit tax free.  It is 500K if you are marred. 

 However, because of the mixed use of your properties you have the opportunity to take both the sec 121 exclusion and do a sec 1031 exchange on the rest.  Your acct should have allocated the property between personal and investment use.  You can use an attorney experienced in 1031 exchanges if they are an unrelated party to you by business or blood relationship.  There are numbers of specialized qualified intermediary firms for 1031 exchanges as well.

 I've always preferred the capital gains exclusion (thus my reason for holding flips for 2yrs, as mentioned early in my OP) over the 1031 exchange but this sounds like an awesome mixed-use hybrid allocation to explore in future multi-fams lived in, even just a duplex! I would imagine the bare minimum would be that the past 2 yrs tax return would reflect rental income for the investment unit(s), as well as not claim business losses etc for the primary residence unit. Thanks! =D

Hi Neil,

Again, be careful using the term "flips" whether short-term or long-term.  Your intent must be to hold for rental or investment purposes (not held for sale like rehabs/flips).  Your transaction can still be disqualified after a two year holding period if they can prove your intent was to hold for rehab/flip and not rental. 

Split use properties where you rent part of the property out and live in the other part are perfectly O.K. as long as everything is well  documented.  We assist clients with them all the time.

Thanks Bill for the caveat emptor! 

sure sucks that beauracratic entities can't seem to be okay with a property purchased for rental income for 2 years then expected to be exchanged after the 2 years since most young adults nowadays nationally tend to move every 2-3 years whether tenants or owners alike. (dont quote me on that rough statistics but it sure seems that way!)

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