Can I Exchange Two Rental Homes for One?

16 Replies

I'm wondering if anyone is an expert on or has experience with doing a 1031 exchange with two homes for sale at one time?  I have a condo in St Petersburg, FL, and a home in Northern Colorado and I'm wondering if I can postpone my gain by selling the two at the same time - with the intent of buying one home in the Denver Metro area?  Who's a tax expert?

Not an expert, but as far as I know, yes.  Your 45 and 180 day clock starts with the first sale.  Then, it's essentially like doing one for one; all net proceeds/cash reinvested and replacement property exceeds the proceeds from the two houses combined.  Of course, going through a Qualified Intermediary.

I can't tag Bill Exeter.

I thought we were about to play, "Let's Make a Deal"...

I am looking into this exact same scenario @Casey Schultz  . I hope someone jumps in with at least a general yes or no. I know each transaction is unique!

Hi Casey,

Yes, you can absolutely sell two (2) relinquished properties and acquire one (1) replacement property and qualify for tax-deferred exchange treatment under Section 1031.  The value of the replacement property must be equal or greater than the combined "net sale price/value" of the two (2) relinquished properties if you wish to defer all your taxable gain.

@Casey Schultz  you said a couple of things that gave me more questions. You said a "home" in NorCo. I'm assuming it's not your primary residence and it is an investment property and you have not lived in either of these properties for 2 of the last 5 years. If you have then you might not want to do the exchange but have tax exemption rather than tax deferred.

Originally posted by @Bill S.:

@Casey Schultz  you said a couple of things that gave me more questions. You said a "home" in NorCo. I'm assuming it's not your primary residence and it is an investment property and you have not lived in either of these properties for 2 of the last 5 years. If you have then you might not want to do the exchange but have tax exemption rather than tax deferred.

Hi Bill S,

The subject line of the OP indicated that he would be selling two rental properties for one, so it is not a primary residence.

Thanks All.  Great information.  I've become somewhat of an expert on the new 1031 tax laws.  It's now tied to your income so even worse news if you are a high wage earner.  We have worked a deal.  My two rentals are currently under contract and we intend to buy one large home and finish a basement apartment.  If anyone has 1031 questions let me know...I've discovered some great information for the changes for 2014.  I'm not on everyday so please give me some time.....

Hi Casey,

As far as I know the 1031 exchange has nothing to do with how much money you make.

You are deferring all of the gain into  anew property or properties. Now if you do not 1031 and have capital gains then you have long and short term gains which do affect rates paid etc. and taxable income brackets. 

If you could provide the specific new federal case law you are referring to then it would benefit us all if there are changes coming.

I am not an expert on 1031.

Long-term capital gains and qualified dividends

A top rate of 15% applies to qualified dividends and the sale of most appreciated assets held over one year (28% for collectibles and 25% for depreciation recapture) for single filers with taxable income up to $406,750 ($457,600 for married filing jointly). Long-term capital gains or qualified dividend income over that threshold are now taxed at a rate of 20%.

EXAMPLE: If a married couple already has $457,600 of taxable income and an additional $100,000 in long-term capital gains and qualified dividends, the entire $100,000 would be subject to the 20% rate. If, however, they only had $400,000 of other taxable income, then $57,600 of the additional amount would be taxed at 15% and $42,400 would be taxed at 20%.

Add 11% for some State Tax and you are looking at substantial taxes on substantial gains.  Also, recapture is an issue.  Taxed at 25%!

Wow...I'm didn't realize that @Casey Schultz  (guess you learn something new every day). Do you know where it says the dollar amounts in the tax code that refer to the 1031?  Didn't think it was considered a taxable event if new property was greater than or equal to previous property.

@louis Leone you are absolutely right.  If you exchange commercial property (including residential rentals) for property of the same value it is NOT a taxable event.  The recapture goes away in that case too as part of the 1031.  It's the exit strategy from owning rentals and commercial property that gets really tricky...There's some IRS case law on how long you need to rent a place before you can make it your primary residence.....but then you could eliminate $500,000 in gain as personal exemption (husband and spouse).  

Hi Casey,

The exit strategy is generally leaving to your heirs in a "stepped up basis" where all of the deferment is wiped out.

So from what I can see nothing has changed with the 1031. You are talking about tax levels for long term and short term capital gains which you pay out based on how long a property is held if you are not going to do a 1031 exchange.  

Casey,

I used to live in Broomfield back in 1999-2000.  I think you can do an exchange.  Make sure if you are converting to a personal residence, that you understand the conversion rules.

Mark

Originally posted by @Casey Schultz:

Thanks All.  Great information.  I've become somewhat of an expert on the new 1031 tax laws.  It's now tied to your income so even worse news if you are a high wage earner.  We have worked a deal.  My two rentals are currently under contract and we intend to buy one large home and finish a basement apartment.  If anyone has 1031 questions let me know...I've discovered some great information for the changes for 2014.  I'm not on everyday so please give me some time.....

Hi Casey,

I just wanted to jump in here and clarify the post.  You indicated "new 1031 tax laws."  There are new tax laws and tax rates, etc., but there are no new 1031 Exchange laws.  I didn't want other readers to be misinformed. 

Correct, and thanks Bill.  We're confusing 1031 with capital gains rates.....1031 hasn't changed.  Capital gains rates have been graduated based on your income.

Also, with a lot of money invested in real estate @Joel Owens....Leaving it to my heirs may not be mine, or my clients first option.

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