CA 1031 exchange question

3 Replies

I currently own a 2b/2b and has been a rental property for 13 months now. (Was a primary residence before). Wondering what are the requirements for a 1031 exchange if i were to sell the condo and buy a single family rental unit ?

Thanks in advance !

Hi Pari,

First, if you lived in the property as your primary residence for at least 2 out of the last five (5) years, you will qualify for the 121 Exclusion.  This means that you can sell the property and exclude up to $250,000 in taxable gain if you are single and up to $500,000 in taxable gain if you are married.  So, if your taxable gain is less than the $250,000/$500,000 limit and you qualify for the 2 out of the last 5 year requirement, you should sell and not have to worry about the capital gain.  If you do not qualify for the 121 Exclusion, then you can sell and structure a 1031 Exchange.  You would be able to defer the payment of your capital gain, depreciation recapture and Medicare Surcharge taxes as long as the property that you buy is equal to or greater than the value of the property you are selling and you reinvest all of your cash equity.

@Bill Exeter. Good advice.

@Pari Thiagasundaram

Just to clarify a bit, because of the timing involved you actually have the opportunity to take advantage of both sec 121 and 1031 to maximize your benefit.  If indeed you lived in that residence for two years in the previous 5 year period and if the gain is more than the 250/500K primary residence exclusion then you can sell the property and use a 1031 exchange to buy another investment property.  However, if you want to take up to 250/500K in boot out your accountant will apply that to the sec 121 exclusion that you qualify for.  So you would the full 250/500K in gain tax free and the remaining gain including depreciation would be tax deferred under sec 1031.

It doesn't have to be either one or the other.  In your case you can have your cake and eat it too.

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