2 Rentals -> 1 Retirement Primary Residence

[Matthew Dermody]

Hello everyone,

I'm a service member mapping out my path to a retirement home and could use some experienced eyes on my plan. I've done some research and have a strategy, but I want to do this in the most legally sound and tax-efficient way possible while avoiding unforeseen pitfalls.

My Goal:

To consolidate my two current rental properties into a property that will initially serve as a rental and eventually become my primary residence in retirement.

My Plan:

Here is the step-by-step strategy I've put together:

1. Sell my two rental properties (VA Loans) and execute a 1031 exchange, rolling the proceeds from both sales into the purchase of a single investment property.
2. Operate the new house as an investment property.
3. Make upgrades to the property while renting as an expense for a tax advantage.
4. Convert the property from an investment property to our primary residence.

Questions and Potential Pitfalls

This is where I could really use your help. I'm looking for feedback on my plan and answers to some specific questions about the execution.

1. Conversion to Primary Residence: I want to ensure a smooth and legal transition that preserves future tax benefits.

• How do I legally convert my rental from an investment property into a primary residence? What are the legal and financial steps I would need to achieve the conversion?
• How do I minimize taxes like the depreciation recapture? My understanding is that the Section 121 Exclusion can help:
• How can I ensure I'll eventually qualify for the full Section 121 primary home sale exclusion after it has been a rental property for several years

• I plan to hold the new lake house in an LLC for liability protection while it's a rental. If I put the retirement property into an LLC when it's a rental property, does that further complicate the legal transition to my primary residence later on? How do you "take it out" of the LLC to make it your home?

2. The 1031 Exchange: My plan hinges on this, but a 2-into-1 exchange seems complex.

• Timing: What are the biggest pitfalls in coordinating the sale of two properties to meet the 45-day identification and 180-day closing deadlines for a single replacement property? Any strategies to align the timing and avoid having the rentals sit vacant for too long?
• Seller Negotiations: Are sellers generally open to rent-back agreements or delayed closings to help buyers like me align their 1031 timelines?

3. Upgrades and Tax Strategy: My plan is to upgrade during the rental phase.

• What should I be tracking to correctly handle depreciation recapture taxes when I eventually sell decades from now?

Any thoughts, warnings, or personal experiences you can share on this plan would be immensely appreciated. Thank you