Should I go through 1031 Exchange?

Question

Hi,

I own a 4 family house where I lived there for more than 6 years. Then moved to another state in the past 1.5 years. I want to sell this house and it’s 1.4mm. The purchase price of the house was 700k and has around 400k mortgage. Through the years, the renovation cost totaled to about 85k. Is doing a 1031 exchange for another property at 850k selling price makes sense. Or I should do a straight sell of the 4F, and use the proceeds to buy the 850k multi-family property with regular loan?

Kate Li · Answer

@Dave Foster thanks for the input.

Dave Foster · Answer

@Kate Li, You actually get to take advantage of both the primary residence exclusion and a 1031 if you want.  You lived in 1/4th as your primary so that would make $350K (if all units are equal) of the sale) and the profit associated with that tax free.

You could then 1031 the $1050000 remaining and tax defer the rest.  That would necessitate you purchasing at least $1050000 ish (after closing costs) in replacement investment real estate.  So to defer all tax you would need to purchase the one you proposed and another worth at least $200K.  That would defer all tax.

If all you did was purchase the $850K property you would pay tax on the $200K difference but still shelter any remaining gain and tax in the exchange.

Being able to combine tax free and tax deferred is a big big deal!

Dave Foster · Answer

@Kate Li $350 is the allocation to the sale.  The true gain will be the gain allocated to that portion as well.

Kate Li · Answer

@Dave Foster one more question: does the whole 350k applies to the 250k/500k real estate capital tax exemption or the net of the initial down payment is eligible for 250k/500k real estate capital tax exemption?

Kate Li · Answer

I lived in one of four units for more than 3 years in the past 5 years. The anticipated selling price is 1.4mm and the new property I want to buy is 850k. Want to see if 1031 exchange is better than a regular sell and buy.

Jacqueline Gardiner · Answer

It sounds like you'll have a primary home exclusion on one of the four units if I'm understanding correctly. (You lived in one of the units for at least two of the last five years, correct?) You also get to deduct closing costs for each transaction and part of the $85K goes into your basis (excluding the renovations to the unit you lived in).

Is your anticipated sales price 1.4M? or $850K? I would suggest going through the math in a little more detail to determine what your taxable gain would be and what taxes you would owe on it given your tax bracket. Then post again for more input.

Should I go through 1031 Exchange?

Most Popular Reply