Buying a home partially using 1031 money from parents

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Buying a home partially using 1031 money from parents

Mary Chen
Member since 2021 · 16 posts · 6 votes

I'm just not sure what's the best way to do this. So looking for any clever strategies. My parents have an investment home in a different state that they're just been looking to get out of because it's no longer easy to travel. They've been thinking about buying a home in our neighborhood but the housing pricing these days indicate that selling value (e.g. $600k) is just not enough to cover the cost of the new home ($900k) and they no longer can qualify for loan. Is it possible for me (the child) to put my name on the loan? And to add complexity, I also have a home (that I bought 5 years ago). I know I can afford the second loan, but It would be nice if we could eventually make this new home a home I could live with my parents because it is larger but just not sure if it's even possible. Any thoughts?

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

    @Mary Chen, There's a couple different issues here.  The first is easy to accommodate.  The second needs some runway.

    1. Your parents are selling an investment property for around $600K so if they want to do a 1031 exchange they will need to take title to at least $600K in real estate.  If they're buying a property for $900K then they need to take title to 2/3rds of the replacement property.  But you can guarantee  the loan and you could take title to any remaining % interest as a tenant in common with them.

    If the property you are selling is also an investment property then you can do that as a 1031 exchange also as long as you meet the reinvestment requirements.

    If your property is  your primary residence and you've lived in it now for 5 years then you could sell and you'll get the first $250K of profit tax free.  And you won't have a reinvestment requirement.  So that would make it simpler.

    2. In a 1031 your parents are selling an investment property and they must buy a property they intend to use for investment.  So they could not move into it right away.  They would need to use it for investment for a year or two.  But then they could convert the property from investment to their primary residence.  This is where you need the runway.

    But there's a couple good options for you in this scenario

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  • Mary Chen
    OP
    Member since 2021 · 16 posts · 6 votes
    5y

    @Dave Foster

    Can I go into the transaction where my parents treat their portion of the house as rental property and I treat it like I live there as my home?

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

    @Mary Chen, yes, they need to treat their portion as investment however and be very arms length about it.  Have a lease with you, collect declare and report rent (they can gift back rent to you) etc...  For your side you have a primary residence.  

    Since it is all one structure you have to be careful since the demarcations are not visible, to document extra careful.

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