Long time lurker, first time poster. I became a land lord in 2015 when I converted my primary residence into a rental property after living in the condo for two years. Property is located in Evergreen, CO and I am an out of state owner utilizing a local property manager. I will continue to be an out of state owner/landlord for the foreseeable future.
The property has been rented out by the same tenant since the day I moved out. I am up against the 5 year window for capital gains exclusion in the first half of 2018 but realize the property has been a rental for 60% and primary residence for 40% so I can only exclude 40% of the gains from taxation.
The property is cash flow positive bringing in about $600/mo after mortgage, ins, taxes, hoa dues, and management fees. It has been a great property and has appreciated in value nearly about $100k since I purchased the property in 2013. I owe $119k to the bank @ 3.83%.
I am looking for advice and opinions on what the BiggerPockets crowd would do in my situation: hold onto it, sell it before the 5 year window expires on capital gains exclusion, or keep it and 1031 exchange it at a later date but not have to worry about selling it before the 5 year window expires.
@Luke Massaro , Well it's mid December and there could very well be some changed in the qualification requirements for a sale of your primary/former primary residence that make this whole exercise moot. Right now the proposal being floated is that instead of having to lived in the property for 2/5 years it will bump to 5/8.
However, either way, if you qualify you do not get a % of the profit tax free if you are accessing the primary residence exclusion unless the property was formerly an investment property and you turned it into your primary residence and then moved out and reconverted it into investment.
If you move out of your primary residence, convert it into an investment property and then subsequently sell it when you still qualify for the 2/5 years of residency then you get the whole exemption up to the limits of $250K if single ($500K if married). When done along with a 1031 exchange you get the best of both worlds with some gain tax free and the rest deferred in the 1031.
But watch out for that changing residency requirement. It may bite you. But regardless you'll still have the 1031 option if you want to sell.
I am aware of the proposed tax bill implications and that would certainly affect how I would handle the sale of this property going forward if those go into effect.
However, I am a bit confused by your response. I believe I have met both the IRS ownership test and the use test for a Section 121 exclusion but I would have to recapture the depreciation taken in 2015-2017.
I appreciate your response as I had not considered a combined strategy to take advantage of both the Section 121 exclusion and 1031 exchange.
Sorry @Luke Massaro , I phrased it awkwardly trying to be brief.
The IRS treats application of the 121 primary residence gain differently depending on whether you converted a primary to rental or a rental to primary.
If you convert a primary to investment and then sell when you can still meet the ownership and use tests then you get the full 121 exclusion and only have to recapture depreciation.
If you convert a rental to primary then you have to meet the ownership and use tests and when you sell you will have to recapture depreciation and you can only prorate the gain between times of qualified use (as primary) and non-qualified use (investment). And there's one more little gotcha here as well. If the property converted from investment to primary was once the product of a 1031 exchange then you also must have owned the property for a minimum of 5 years.
All bets are off with Congress in session!