converting 1031 to primary residence?

Question

Hi all,

Really hoping someone can help us. We bought a SFH as part of a 1031x and got a good deal. Fixed it over a year, rented it for two years. Despite trying, it has been vacant for 10 months now. We were thinking of renting our home (more desirable location) and moving in there. But we want to sell it this house eventually, how do we protect our gains from being taxed or minimize our taxes? Any suggestions appreciated. Thanks

Lubna Bushra · Answer

Great, thanks for your succinct response. We will follow this and save what we can!  Follow up question-- Once we move, we can still sell our current primary residence within 3 years (residence 2 of last 5 years) and that gain will be tax free, right?

Thanks

Dave Foster · Answer

@Lubna Bushra yes, you can do a primary residence exclusion sale once ever two years.  so move out and sell that old property within 3 years and you'll still get the full exclusion.

Dave Foster · Answer

@Lubna Bushra If you've used that for an investment for two years then you've satisfied the intent rule.  You could convert that into your primary.  And rent your former primary.

Once you've lived in it for two years you'll be eligible to sell it and take a proration of the gain tax free.  If you've owned it for 5 years and lived in it for 20 years you would get 40% of the gain tax free (and recapture depreciation).  If you've owned it for 10 years and lived in it for 7 years you would get 70% of the gain tax free.

Conversion of a rental to your primary is a great way to take some tax off the table.