I'm thinking about moving in a few years. I would like to sell a couple of my investment properties and 1031 into a new house. I would in turn rent this house out for a minimum of one year and a day at market rates and then occupy it myself. My first question is: does this trigger any kind of taxable event? If it does, are there different strategies to avoid it (ie: longer wait period, etc.)?
With that in mind I would want to take advantage of the 500k (I'm married) tax free gain on a primary residence based on the occupancy standards.
I've read about others doing this (not on BP) and was wondering if anyone has any experience or advice on this particular subject or if it's just out and out not possible
Relinquish several investment properties in a 1031 exchange in which you acquire one replacement property. Use the replacement property for a qualified investment use for a couple of years, then convert it to a primary residence. After at least five years of ownership, sell the property. As long as you and your spouse have occupied the property as a primary residence at least two of the five years prior to sale, take the maximum capital gain exclusion when married filing jointly,
Yes, can be done. Can you exclude $500K from taxes -- no, but you might get close.
Under the current tax code, the portion of time that you used the property as a rental is a period of non-qualified use for the capital gains exclusion. The maximum gain that can be excluded is reduced by the percentage of your ownership that the property was in service for a non-qualfied use.
Using the example above, the 1031 replacement property is used for a qualfied investment purpose for two years to establish the 1031 exchange. Then the property is converted to a primary residence, and occupied as such until sold at the end of five years of ownership.
Two of the five years are periods of non-qualfied use. Only 60% of your period of ownership counts as qualfied use, so only 60% of the maximum capital gain exclusion is allowed. In this example only $300K of capital gain can be excluded from taxes for a married couple filing jointly.
The longer you own the property and the longer you occupy as your primary residence improves the percentage of qualified use and therefore increases the allowed capital gain exclusion. You should note that to qualify for the capital gain exclusion for this property, you must own the property at least five years, and you must occupy the property as a primary residence at least two of the five years prior to the sale
You will still have to pay the tax on the unrecaptured depreciation you were allowed while the property was in service as a rental. Unrecaptured depreciation is never excluded from taxes, even for a primary residence.
So another question on a 1031 with a twist. I hold my property with a corporation based in the state that I live in now. I want to sell this property and be based in another state. I don't want to hold the new property in the corporation in the old state. What strategies can I use to do a 1031 between 2 states? Or is it impossible?
Not impossible. Interstate exchanges are done all the time. As a general rule, the replacement property in a 1031 exchange needs to be titled exactly as the relinquished property in the exchange.
This means that if your corporation sells the relinquished property, it must also acquire the replacement property.
Your tax advisor can tell you the tax consequences of taking your property out of the corporation.
The interstate exchange is recognized for federal income tax purposes, although there are some states that do no recognize the exchange for their state tax return. Consult with your tax advisor on this point if your state has an income tax.
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Aug 10 '09, 02:35 AM
