Rental Property Investor · Fort Wayne, IN · Member since 2017 · 5 posts · 0 votes
Greetings from Indiana. We are about to list our primary residence for sale (house 1 for the sake of this conversation). We are already in the process of closing on a new primary residence (house 2), and do not need the equity in house 1 to buy house 2. HOWEVER we have been dying to get into the rental property business for a long time. We would love to take the 30k in equity (mostly sweat equity) in House 1 and roll it into a rental. We are new, and I have no idea how this works. How much time would we have after we sell house 1 to roll this into a rental so we avoid capital gains?
Also, we do not want to keep house 1 to use as a rental because it is on 5 acres that take 2 hours to mow. Plus, it is far from the new home, so a challenge from a newbie management prospective.
@Sarah King If you have lived in house #1 for 24 out of 60 months you may qualify for the 121 primary residence exclusion. It allows you to exclude $250k (if single) and $500k (if married) of gain from your income. Therefore you may already be in a situation where the gains aren't taxable. Do you expect to see more than $250k/$500k gain on this property?
What you are trying to do here is a 1031 Exchange where you take the profits from a house sale to buy a property of equal or greater value which will result in no capital gains tax incurred.
They only thing I can suggest is to find local professionals who are experts on this matter. The method is a little convoluted where its not something that you can do yourself. So find local RE agents who know professionals or companies who do this line of work and guide.
@Sarah King If you have lived in house #1 for 24 out of 60 months you may qualify for the 121 primary residence exclusion. It allows you to exclude $250k (if single) and $500k (if married) of gain from your income. Therefore you may already be in a situation where the gains aren't taxable. Do you expect to see more than $250k/$500k gain on this property?
If you qualify for the 121 primary exclusion, you’re home free.
If not, you can’t 1031 a primary, do you’ll have to pay cap gains.
BTW, it’s not your Equity that is taxable, it is your Gain.......selling price minus selling/closing costs, minus purchase price plus major improvements.
Thanks @Wayne Brooks and @Lauren Speidel this was very helpful. We do qualify for 121 primary residence exclusion, after reaching out to an accountant. I really appreciate your insights!