1031 exchange AND 121 exclusion with a twist!
First post. I am a lurker for sure, so thank you guys for all your great information so far.
I am single, and currently have a home in Los Angeles valued at approximately $700k. I purchased this home 7 years ago for $241k. I did a refi 5 years ago to start a business, pay down debt and redo the kitchen, so my current mortgage is $334k.
My question:
I’ve see on these forums that it is indeed possible to combine 1031 exchange and 121 exclusion so long as you’ve lived in the home 2 out of the past 5 years and also can prove you’ve used the home as an “investment property”.
For the investment property portion... I’ve been renting a room in the house to a roommate/tenant for the past 5 out of 7 years... however I haven’t claimed a renter on my taxes.
If my end goal is to sell my property in 2019, would my move be to show the rental on my 2018 taxes and possibly even revise my taxes from a previous year to help prove the “investment” stipulation of the 1031? And does a roommate/renter even count as making my home an “investment property”? or do I need to be completely moved out for it to count?
I realize i’d pay tax on the rental income, but that would still be less than the tax i’d owe on the money above the $250k exclusion without the 1031 exchange. Way less if I can get away with showing only 12 months vs 24.
Alternately, i’ve claimed a home office in the house. Would that impact the “investment income” stipulation?
With improvements to the home i’ve calculated my cost basis around 300k. This would mean my capital gains will be assessed around $400k. $250k would be exempt. $150k would be taxable unless i can make the 1031 work.
Thanks for any help!