Can I Do A Like Kind Exchange With Myself?
My wife and I own two rental properties in state "A" that we have for sale because we don't want the headaches of long distance management, etc. We currently reside in state "B" on a 3 acre parcel, in a granny unit.
We have building permits to build the main house on the same 3 acre parcel. Once the main house is built, we will then rent out the granny unit. The county forbids us from sub-dividing the property.
Does anyone know if it is possible to sell the two houses in state "A" and then somehow do an exchange for the granny unit?
Would I have to set up an LLC of some kind?
Here are my thoughts. If my wife and I establish an LLC and then transfer title of the property in state "B" to the LLC, could we not then buy the property from the LLC as the replacement property? Our overall intent is to build and live in the main house and rent the granny unit.
FYI, the FMV of the granny unit and 3 acres is greater than the FMV of the two houses in state "A"
Would appreaciate your feedback. Thanks.
1031 exchange rules prohibit your personal residence from participating in an exchange.
You are free to use the two rental properties in state A as the relinquished property for an exchange, but you would have to acquire "like-kind" property to replace your investment property in state A.
Under the present rules, real property held for investment use (production of income, or future appreciation) can be exchanged with other real property that you hold for investment use (production of income, or future appreciation). You can exchange your rental property for undeveloped land, for example, as long as the relinquished property and the replacement property are both investment property under the IRS definition of an investment use.
Your personal residence is not an investment property, and therefore does not qualify to participate in a 1031 exchange.
Because you have already purchased the granny house and the land in state B, it is not eligible to participate in a 1031 exchange even if you had a qualified investment use. Selling to your LLC and repurchasing from your LLC would not make your property eligible for a 1031 exchange. The IRS has rules that prohibit this type of deal to make your property eligible for an exchange.
You would have other problems with the land. Once you subdivide, the land used for your personal residence would still not be eligible to participate in an exchange.