primary residence to rental, then 1031 to primary?

6 Replies

Hi guys,

I'm fairly new to 1031 exchanges and had a question about 1031 exchanging from rental to primary residences. Here's the scenario:

I've owned a home in California for the past 3 years. I plan to rent it shortly for 3-4 years, and then do a 1031 exchange of the rental to a primary residence. Would this scenario qualify for 1031 treatment?

Thanks for your time!

Jesse

Originally posted by @Jesse Giacomelli :
Hi guys,
I'm fairly new to 1031 exchanges and had a question about 1031 exchanging from rental to primary residences. Here's the scenario:
I've owned a home in California for the past 3 years. I plan to rent it shortly for 3-4 years, and then do a 1031 exchange of the rental to a primary residence. Would this scenario qualify for 1031 treatment?

Thanks for your time!

Jesse

@Jesse Giacomelli ,

As @Jon Holdman said you cannot 1031 into a primary residence. Now, that said if you did a 1031 into something you later convert to a residence there is nothing wrong with that as long as you do hold it at least long term. I'd recommend at least 2 years before moving into it.

Jessie- What the IRS law states is that as long as it was a rental property for 2 of the last 5 years prior to sale you can 1031 it into another rental property.

Originally posted by @Joe L. :
Jessie- What the IRS law states is that as long as it was a rental property for 2 of the last 5 years prior to sale you can 1031 it into another rental property.

Joe L. ,

You are confusing this with the Section 121 Exclusion for Sale of primary residence. It states that if you lived int he house for 24 of the last 60 months before the sale you can exclude up to 250k of gain (500k if Married filing jointly).

-Steven

Jesse, the path you take should also depend on the amount of your capital gain. You have lived in your property for 2 out of the last 5 years, so you qualify for the 121 Exclusion. You have a three (3) year window after you move out of the property where you can still qualify for the 121 Tax Free Exclusion. So, if you sell and close on the sale before the three (3) year window is up, you can still exclude up to $250,000 if you are single and $500,000 if you are married in capital gain. If your gain is over the $250,000/$500,000 threshold, you can defer the rest of the gain through a 1031 Exchange as long as you rent it long enough to prove you had the intent to hold for investment and then exchange into a replacement property that is also held for investment. Once you pass the three (3) year window, you would only qualify for 1031 Exchange treatment. You would then have to 1031 Exchange into rental property (you can convert to a primary residence after renting it for a sufficient period of time, generally recommend 12 to 24 months).

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