1031 Exchange & Section 121 Questions (TX/CA)

[Alex Gronbach]

Hi BP!

I’m in the process of selling a property which I lived in for two years when I bought it in 09/15 and then have rented out since 01/18. I currently reside in CA, and the property is located in TX. I am selling the property for approximately 90K above what I purchased it at almost 5 years ago. 

That being said, it sounds like I am eligible for both a 1031 exchange as well as a section 121 exclusion. But as I understand it (and please correct me if I am wrong), the Section 121 Exclusion would only exempt federal gains taxes, and I would still owe CA taxes on the ~$90K of gains. Does anyone know what this approximate tax burden would be? Is this taxed at regular income tax rates? Higher/lower?

What I am thinking of instead is to claim the Section 121 exclusion AND go through a 1031 Exchange to split this property into two smaller single family rental properties in TX. This would I believe guarantee zero or almost zero tax burden on this transaction, but I don’t know if it is overkill or if CA still has some wonky way of making me pay taxes even after the 1031/121 processes. 

Any guidance and insight you can provide would be greatly appreciated!

[Natalie Kolodij]

You don't need a 1031 exchange. 

Since you occupied it 2/5 years your gain is fully tax free under 121.California as well.

Your only tax will be depreciation recapture on 2 years worth of depreciation. Likely not enough gain to warrant the cost/hoops of a 1031.