1031 a rental house or move to qualify for 2-5 exclusion?

Question

When my husband and I got married, I had my own house and we decided to rent it out and move into his place. It's been a great little income producer, but we are looking to get into commercial properties rather than single family rentals. The house was also completely gutted and redone in 2014, so I want to sell while it is still in newer condition. I purchased the house in October 2014, and moved out and started renting it in July of 2016, and have been taking depreciation. If we wanted to sell in 2018, we would either need to pay capital gains on the sale or do a 1031 on the property since I moved out before a full 2 years of residency. Has anyone been in this situation and moved back into the home for a few months to qualify under the 2 -5 exclusion? Since we are planning to put the gains into a new investment property, we would probably do a 1031 but it would be nice to not be required to do it this way and save a little cost.  Any input would be appreciated!

Johnny Borrelli · Answer

Sarah, before you do anything, reach out to me.  I have learned a great way to take advantage of a 1031 opportunity.  Through commercial trust, it may be just what you are looking for.

Sarah Humbargar · Answer

Thanks everyone, this has been really helpful. I think we are going to take the 1031 track since we are looking to continue our investments, but I appreciate the insight on our situation! Lesson learned.

-Sarah

Dave Foster · Answer

@Sarah Humbargar, That's exactly what you need to do if you want to get the 121 exclusion - move in for 3 months.  You'll also want to be very careful to be able to document that since the facts of the situation are a little hinkey and certainly it looks like you're trying to take advantage of a law - which you are.  But that is perfectly fine.  Just make sure you take advantage of the law in the appropriate manner.

Account Closed, nothing personal but none of this rent to a friend or relative stuff.  that's fraud.  And you have no idea the amount of pain the IRS can cause you and the number of ways they can find out.  In the scenario you mentioned your'e getting income from a friend.  Do you declare that income?  Then there's a crystal clear paper trail on your tax return that the house is not your primary residence.  Do you not declare the income?  Now you're committing two frauds in the primary residence thing and not declaring earned income.  It's a very slippery slope.

You've got to actually make it your primary residence.  that means your other house has to cease being your primary residence.  So think drivers licenses, voter registration, homestead exemptions, mailing addresses for credit cards, school registrations, vehicle registrations, etc etc etc.  It's actually kind of crazy all the things you have to do to move into a house.

So given all that and the fact that you've both got the 1031 option and a desire to continue investing it seems like the easiest way to sleep at night would be to simply do a 1031 pay $750 bucks and not have to look over your shoulder.

Account Closed · Answer

Sarah,

My wife and I are in the same situation. From what I understand you need to live there for a full 2 years.  Or if you changed your mailing address to that home and rented to a really good friend who would forward your mail. I had family living there, and they are right when they say never rent to family. We are looking at doing a 1031 exchange, that's what brought me to this website. Anyway good luck.

Ed