1031 exchange my primary residence.
Investor · San Jose Ca · Member since 2020 · 125 posts · 115 votes
1031 exchange my primary residence.
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Jonathan St.LegerPro Member
Investor · Kitty Hawk OBX NC · Member since 2019 · 44 posts · 39 votesHey Jeffrey, I'm not aware of a minimum time that your primary would need to be a rental before you could do a 1031 exchange. However I did want to make sure that you were aware of the section 121 exclusion, which states that so long as you have lived in your primary residence for a combined total of at least 2 years of the last 5 years prior to selling it that you can make up to $250,000 profit tax free as a single individual or up to $500,000 profit tax free as a married couple under this exclusion. Thus eliminating any current or future tax liabilities on said profits. Any profits made above and beyond those amounts you would simply pay capital gains on that difference. Whereas with a 1031 it is a tax deferral until you eventually sell and harvest those gains at which time you will realize all those gains and have to pay the deferred capitals gains. With the 121 exclusion you will never have to pay taxes on the 250K - 500K
As always consult with your CPA for confirmation in regard to your situation specifics, but hopefully this will give you some intel to have good conversation with them. Wish you the best of luck!
25 Replies
- 3yJonathan St.LegerPro MemberInvestor · Kitty Hawk OBX NC · Member since 2019 · 44 posts · 39 votes
Hey Jeffrey, I'm not aware of a minimum time that your primary would need to be a rental before you could do a 1031 exchange. However I did want to make sure that you were aware of the section 121 exclusion, which states that so long as you have lived in your primary residence for a combined total of at least 2 years of the last 5 years prior to selling it that you can make up to $250,000 profit tax free as a single individual or up to $500,000 profit tax free as a married couple under this exclusion. Thus eliminating any current or future tax liabilities on said profits. Any profits made above and beyond those amounts you would simply pay capital gains on that difference. Whereas with a 1031 it is a tax deferral until you eventually sell and harvest those gains at which time you will realize all those gains and have to pay the deferred capitals gains. With the 121 exclusion you will never have to pay taxes on the 250K - 500K
As always consult with your CPA for confirmation in regard to your situation specifics, but hopefully this will give you some intel to have good conversation with them. Wish you the best of luck!
- 3yErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
Quote from @Jeffrey Evans:
How long would I have to be moved out and renting my primary residence in order to be able to sell it and do a 1031 exchange?
thanks in advance.
Hi Jeffrey,
Is there a specific reason why you are looking to sell? Have you looked into leveraging your equity via a cash out refi or HELOC?
LuxePrivate Investments LLC 572 Reviews - Investor · San Jose Ca · Member since 2020 · 125 posts · 115 votes3y
@Jonathan St.Leger thanks for the info. @Erik EstradaI am asking for a friend. Basically her mother is older and has owned the house for like 40 yrs in the bay area of cali so her profit will be much more then 250k. Trying to brain storm to help reduce there tax burden while creating some income to help with the mothers care in the future (she has dementia). Was thinking if they rent it out long enough they could sell it and 1031 it into a duplex or something that would lower the taxes and bring in some monthly income. Better option could be to do a reverse mortgage and the kids can sell it after she passes away in the future. As far I know this would minimize the taxes due to step up tax law. Just brain storming
- 3yErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
Quote from @Jeffrey Evans:
@Jonathan St.Leger thanks for the info. @Erik EstradaI am asking for a friend. Basically her mother is older and has owned the house for like 40 yrs in the bay area of cali so her profit will be much more then 250k. Trying to brain storm to help reduce there tax burden while creating some income to help with the mothers care in the future (she has dementia). Was thinking if they rent it out long enough they could sell it and 1031 it into a duplex or something that would lower the taxes and bring in some monthly income. Better option could be to do a reverse mortgage and the kids can sell it after she passes away in the future. As far I know this would minimize the taxes due to step up tax law. Just brain storming
I see now. If your friend's goal is to take care of her mother and have some monthly income coming in I can see how a reverse mortgage will be beneficial.
LuxePrivate Investments LLC 572 Reviews - Manhattan Beach, CA · Member since 2021 · 76 posts · 40 votes3y
The IRS doesn't have a set timeline as to how long you should have a primary residence rented out for prior to doing a 1031 exchange, however the general consensus you'll hear from QI's, attorneys, and CPAs is just about two years. You can run the risk of renting for a year and moving on but the potential of getting audited is much higher.
An option for the exchange considering her mental state may be a Delaware Statutory Trust (DST). DSTs are passive investments that qualify for the 1031 exchange. I'd consider looking into them considering she may not want to purchase another property two years down the line.
- Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes3y
Disadvantage with reverse mortgage: Cannot be in a Living Trust and goes through probate upon death. Heirs have 12 months to payoff/ refinance/ sell or ask for 12 more for total 24 months to execute their plans.
Probate is not something I wish upon anyone. Cost, time, loss of control.
If Mom has no heirs or heirs have great income she can live in the house and get in home care (cost maybe $6000- 8000 in California but can she stay in place until she dies, does family want this?) Mom only pays taxes, insurance, HOA...
Or refinance conventional depending on her income and use for temporary money and rent the house to supplement. She then moves to care facility?
How old is she? How advanced is dementia? Could she actually sign with a notary and be considered able to know who is the President and what day it is? Family is close by? Can she live with a family member? How many heirs and do they agree on same plan?
Suggestions: Make sure house is vested in Living Trust, she has her care wishes in writing, get the valuables out of the house, one way to spread out the tax over the $250000 gain plus improvements is to sell the someone who is already preapproved for a loan (not someone who can't get a loan) offer them 6% or 7 % rate with penalties to prepay first three years to avoid the lump sum. Take a 25% down payment then spread the taxes over 5-7 years until they sell or refinance.
- Investor · San Jose Ca · Member since 2020 · 125 posts · 115 votes3y
Quote from @Caroline Gerardo:
Disadvantage with reverse mortgage: Cannot be in a Living Trust and goes through probate upon death. Heirs have 12 months to payoff/ refinance/ sell or ask for 12 more for total 24 months to execute their plans.
Probate is not something I wish upon anyone. Cost, time, loss of control.
If Mom has no heirs or heirs have great income she can live in the house and get in home care (cost maybe $6000- 8000 in California but can she stay in place until she dies, does family want this?) Mom only pays taxes, insurance, HOA...
Or refinance conventional depending on her income and use for temporary money and rent the house to supplement. She then moves to care facility?
How old is she? How advanced is dementia? Could she actually sign with a notary and be considered able to know who is the President and what day it is? Family is close by? Can she live with a family member? How many heirs and do they agree on same plan?
Suggestions: Make sure house is vested in Living Trust, she has her care wishes in writing, get the valuables out of the house, one way to spread out the tax over the $250000 gain plus improvements is to sell the someone who is already preapproved for a loan (not someone who can't get a loan) offer them 6% or 7 % rate with penalties to prepay first three years to avoid the lump sum. Take a 25% down payment then spread the taxes over 5-7 years until they sell or refinance.
good to know about the reverse mortgage and the trust. Probate can be a nightmare. 2 kids live with her. She has no income I don't think. maybe SS. I think she is in her 70's. Ideally the kids want to sell now I think. I think emotionally they would rather do it now while she is alive vs after she passes. I believe my friend is the durable power of attorney and stuff for her.
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes3y
After she passes there are zero taxes. Selling before then is a $50,000 mistake? $200k mistake? Hopefully the kids are paying her rent and she can live on that. (I assume the “kids” are 30-50 years old if she’s in he 70’s. So I also assume they wouldn’t leech off her.) She should basically be house-hacking with those kids paying her.
California is a transfer on death deed state so there is zero need for probate. She simply fills out the form in front of witnesses and files it. She can change her mind/beneficiaries at anytime before her death
I can’t see how her paying taxes today and then starting to pay rent is a good idea other than kids wanting to get their hands on money. If he kids haven’t been horrible with money for decades have them pay mom like they should have been doing. Her cost of living is probably near zero.
- Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes3y
I'm guessing she has a $1,500,000 house free and clear, paid $200000 for it 40 years ago, some repairs over the years $140000 less the $250000 exclusion and $20000 sale expenses the taxable amount is a million dollars and maybe $400000 is owed to state and IRS if she sells while she is alive.
Does she have a mortgage or credit card debt? Does she have unpaid medical bills?
@Bill B. transfer on death might not be the best choice for the children. Beneficiaries that receive a property from a transfer on death deed are held personally liable for all of the debts of the deceased person’s estate, even if the debts had nothing to do with the property. These beneficiaries are adults probably 45 years old. I agree they should pay her rent. I guess she has medical bills and with no income those pile up.
In California if the deceased person has more than $166,250.00 of assets in his or her name alone and there is no surviving spouse or the assets were not left to the spouse, the answer will be California forces probate if the deed is not in a Living Trust. I guess she exceeds the threshold.Is she wandering out of house so they think they need to have her in a facility? It really depends on how long they expect her to live.
Since I don't have the whole situation it's difficult to help you.
- Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes3y
@Caroline Gerardo You are one smart lady.
- Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes3y
Quote from @Terrell Garren:
@Caroline Gerardo You are one smart lady.
Seen thousands of these.
The worst is when an attorney is in charge of large probate estate and beneficiaries are minors. Attorney milks the estate $120000 a year salary, buys crazy stuff, and after ten years the money is gone, poof.
Dig into the moving parts: ages of all the parties, health and longevity of each, options, who is responsible, who is not responsible...
Terrell you are a young man. This type of planning all people should prepare but only the 3% of Americans do, and thus money goes to the tax man and the suits.
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes3y
Medicare/medicaids gonna go back what, 5 years? Anyway. So she’d be paying the debt instead of the kids. I understand skipping out on debt could be an upside I guess. But only if you’re suggesting she give away the million and then start renting. But if she can’t afford to live in a paid off house I don’t see her affording rent. If she sells it sounds like all the money will go to assisted living ($100k+/yr for 10 years +?) and the kids finally become homeless.
Most of those assisted living places and even the government should have a patient or senior advocate. Or she spends $1000 on a fee based financial planner to save the $200k+ in taxes. Lots of options.
- 3yDaniel JohnsonPro MemberFinancial Advisor · Winston Salem, NC · Member since 2016 · 195 posts · 161 votes
To the original question, usually you need at least a year of rental to substantiate the change to an investment property. Best practice to have the property show up on at least one tax return.
Because she would have lived in the home for 2 of the last 5 years, there is a possibility of executing a combined section 121 exclusion($250k tax free) + 1031 for the excess. You would need to work very closely with CPA and Qualified Intermediary to make sure no land mines are stepped on. That would potentially give them $250k of liquidity, while also deferring the gains and preserving the step-up in basis.
They don’t need to make any rash choices. They need to speak with a professional that doesn’t have any “skin in the game” like a fiduciary advisor, CPA or attorney. Not anyone looking to sell a product.
- 3yDaniel JohnsonPro MemberFinancial Advisor · Winston Salem, NC · Member since 2016 · 195 posts · 161 votesAlso, don’t have high hopes of this lowering her taxes. If she does a 1031 and starting earning rental income, her taxes will go up. In addition, she probably won’t have any basis to depreciate against, so the taxable income would be higher than if you bought the duplex with cash.
Quote from @Jeffrey Evans:
@Jonathan St.Leger thanks for the info. @Erik EstradaI am asking for a friend. Basically her mother is older and has owned the house for like 40 yrs in the bay area of cali so her profit will be much more then 250k. Trying to brain storm to help reduce there tax burden while creating some income to help with the mothers care in the future (she has dementia). Was thinking if they rent it out long enough they could sell it and 1031 it into a duplex or something that would lower the taxes and bring in some monthly income. Better option could be to do a reverse mortgage and the kids can sell it after she passes away in the future. As far I know this would minimize the taxes due to step up tax law. Just brain storming
- Investor · San Jose Ca · Member since 2020 · 125 posts · 115 votes3y
Thanks for all the insight I appreciate it. @Bill B. I agree they should find a way to keep it for now.
@Caroline Gerardo my friend (the daughter) and her brother live with the mom. She has for a long time and has been paying all the bills and stuff. I think the house is paid for. She bought it in 1987 5/3 in A decent area of San Jose so ya worth a decent amount for sure. I don't think the mother has any debt so that shouldn't be an issue. The house is in the mothers name but she has a living trust and a legal will. I believe she has ok insurance so I don't think the medical bills are an issue. They are just trying to plan for when she has to have 24 care. I am not sure how far away that is. She isn't wondering off or anything but I think she isn't to far off from it. I am not sure if she is still signing legal docs or not.
- Investor · San Jose Ca · Member since 2020 · 125 posts · 115 votes3y
Quote from @Daniel Johnson:
To the original question, usually you need at least a year of rental to substantiate the change to an investment property. Best practice to have the property show up on at least one tax return.
Because she would have lived in the home for 2 of the last 5 years, there is a possibility of executing a combined section 121 exclusion($250k tax free) + 1031 for the excess. You would need to work very closely with CPA and Qualified Intermediary to make sure no land mines are stepped on. That would potentially give them $250k of liquidity, while also deferring the gains and preserving the step-up in basis.
They don’t need to make any rash choices. They need to speak with a professional that doesn’t have any “skin in the game” like a fiduciary advisor, CPA or attorney. Not anyone looking to sell a product.
For sure. They need to just talk to a professional. Its a lot of money and a lot of decisions to make.
- Investor · San Jose Ca · Member since 2020 · 125 posts · 115 votes3y
I guess she is still able to sign but the daughter is power of attorney.
- 3yRyan KellyBusiness MemberReal Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
@Jeffrey Evans you can’t do a 1031 tax exchange with a primary residence. It has to become an official business first, which would start as soon as it becomes a rental property. At that point, talk with your CPA and a 1031 intermediary for the official time it needs to be in service before an exchange can occur. I believe the minimum is over 1 year in service.
Ryan Kelly Group - Keller Williams5110 Reviews - 3yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Jeffrey Evans, You're pursuing a very sound strategy here. There is not statutory holding period to qualify a property for a 1031 exchange. the requirement is that your intent must be to hold it for investment. So it's all about how you can demonstrate that intent. Most folks feel very comfortable with anything more than a year.
If your friend holds that property for rental for a year and then sells two things will happen:
1. They will still get the first $250K of profit tax free because they will still have lived in the property for 2 out of the 5 years prior to sale.
2. They can 1031 exchange the remainder. So there will be no tax due. And they can reposition that into a property that can generate income.
That's a great win-win
The 1031 Investor5137 Reviews - Investor · San Jose Ca · Member since 2020 · 125 posts · 115 votes3yIf any house is not in a trust it goes to probate when the owner dies? They have a legal will I guess but doesn't sound like that matters much with regards of it going to probate.
Quote from @Caroline Gerardo:
Quote from @Terrell Garren:
@Caroline Gerardo You are one smart lady.
Seen thousands of these.
The worst is when an attorney is in charge of large probate estate and beneficiaries are minors. Attorney milks the estate $120000 a year salary, buys crazy stuff, and after ten years the money is gone, poof.
Dig into the moving parts: ages of all the parties, health and longevity of each, options, who is responsible, who is not responsible...
Terrell you are a young man. This type of planning all people should prepare but only the 3% of Americans do, and thus money goes to the tax man and the suits.
- Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes3y
In my guess formula if house is worth $1,5 mill or even $900 the total dollar amount of probate threshold $166250 far exceeds ... If the title is not recorded in the Living Trust they need to complete that step or probate comes to play after she dies.
I can recommend a title company to pull the report for free to check. The power of attorney daughter if savvy can copy. cut. paste the legal description and EXACT name, dates, of the old deed and the Living Trust and record for $30. OR pay an attorney who does estate planning to execute for like $500-1000. Attorneys can record it digital rather than waiting in line at Santa Clara county recorder
Lookup the address here and see what name is on title https://clerkrecorder.sccgov.o...
When Mom set up Living Trust maybe the person recorded it for her???
- Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes3y
If it's a primary why would you want to do a 1031 and not get a primary home sale exemption?
A 1031 is a tax deferral, a primary home sale exemption is no tax. (Up to certain amount).
- 3yJay ThomasPro MemberReal Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
If you're considering a 1031 exchange for your real estate investment property, it's important to meet the "qualified use" period requirement. This period requires that the property must be used for business or investment purposes for at least 24 consecutive months prior to the sale. Consulting with a tax professional or qualified intermediary can help ensure that all requirements and guidelines are met, making this an important step in executing a successful 1031 exchange.
- Manhattan Beach, CA · Member since 2021 · 76 posts · 40 votes3y
Quote from @Luka Milicevic:
If it's a primary why would you want to do a 1031 and not get a primary home sale exemption?
A 1031 is a tax deferral, a primary home sale exemption is no tax. (Up to certain amount).
The owner bought the property 20+ years ago in the bay area and it has probably appreciated much more than the 121 exemption. He said this in a comment.
- Investor · San Jose Ca · Member since 2020 · 125 posts · 115 votes3y
after further questioning my friend I guess the house is in a living revocable trust. Good to avoid probate I guess. But cant do a reverse mortgage from what I am hearing? How hard would it be to flip it out of the trust do the reverse mortgage and then flip it back into the trust.
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