1031 Exchange question

3 Replies

Hello all!

I'm asking a question for my father, who is 70, and lives in SC. He owned a house in FL that used to be his primary residence, but he rented it out for last 10 years. While he rented the house out in FL, he was a renter in an apartment complex in Anderson, SC. He sold the FL house and profited a little (20K-ish).

Here is my question:

If he was not a primary homeowner, but owned an investment property, and sold it. Does he have to pay capital gains on the 20K if he purchases a primary residence with the proceeds? It seems there would be an argument for him not gaining wealth here. He literally has to put the profits towards his new purchase which will be owner occupied. 

I'm grateful to anyone who knows info that could help me help him. 

I am everything I am today because of this man. 


@Tim Wilkinson , a sale of an asset that creates a profit will recognize a gain and the tax on that gain.  Your father's sale did not meet the qualifications for the sec 121 primary residence exclusion.  And he did not perform a 1031 exchange upon the sale of his investment property (this had to begin prior to sale).  So he will pay tax on the gain.  It would be worth your while to verify the profit numbers with his cpa.  Over 10 years of ownership there could be significant capital expenses waiting to be had.  But of course there's also 10 years of depreciation to recapture.

As an aside, even if he had performed a 1031 he could not have purchased a property to be used as his primary residence immediately.

@Dave Foster thank you. He did some relatively major capital expenses that could cushion the blow some for sure. That may be the angle we have to take.

I also just read that you have to begin the 1031 process within 45 days of sale of the relinquished property, so he’s already passed the deadline anyway.

@Tim Wilkinson ,  That's not true about the 45 day window.  In order for an exchange to be valid the qualified intermediary must be in place prior to the closing of the sale.  

The 45 day window you're referring to is the 45 day period after the closing of the sale that is your opportunity to identify potential replacement properties.  You have 180 days from the closing of the sale to complete the exchange by purchasing one or more of the properties on the 45 day list.

However you are right.  His window of opportunity passed when he closed the sale.  But capital expense angle is probably a good bet.

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