1031 Exchange: Primary Residence To Rental Property?

Question

Hey all! I bought a primary residence about 10 months ago. After rehabbing the property, I've gained about $100k in value. Because I don't want to wait until the two year mark to sell (to avoid the capital gains tax), am I able to perform a 1031 if I trade up to a rental property?

Chad Duval · Answer

Thanks everyone for your help! I love this site! You're all so helpful. @Dave Foster I like your advice. I may look at tapping into my equity so that I can keep the portfolio development process moving forward.

Dave Foster · Answer

Sorry @Chad Duval your property is your primary residence not investment property and thus is not eligible for 1031 treatment. The exemptions to the two year resident holding period for sec 121 which governs your primary residence are not universal or automatic. You can sell and take the prorata gain tax free if you have a certain qualifyiing event such as a job related transfer or are active military.

You could move out and convert it to an investment property but you would need to demonstrate your intent to hold it for some time before then selling and doing a 1031 exchange.

Your best bet is to hang tight and wait the full 24 months and take all the eligible gain tax free. If you're impatient to move on your next investment then tap your equity and buy your next primary residence. Live in the current for two years and then sell, take the gain ta free, and move into your next primary res. You can do this once every two years.

Gregory H. · Answer

To elaborate a little on Steve's point, you are eligible for capital gains tax exemption of (10/24) of the maximum since it is your primary residence. If you file taxes as single, your maximum capital gains tax exemption on a primary residence is $250K. If you file taxes as married, your max is $500K. Therefore, you should not have any capital gains tax on the sale of this primary residence.

Elizabeth Colegrove · Answer

You can only do a 1031 if you turn it into a rental first. While there is no "time" set for how long it needs to be a rental, most people agree on a "year". The test is it need to have had the purpose of being a rental.

So the bad new is you will have to wait, the goodness is you get to "pick" your poison.

Steve Vaughan · Answer

I don't believe you can. Primary to investment is not a like-kind exchange. I think you can get a percentage tax-free now, (10/24ths). If it sold in 2 months, half would be tax free. For that kind of money, I would stay put for a little longer. Good luck and congrats @Chad Duval !

1031 Exchange: Primary Residence To Rental Property?

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