Income tax shelter in primary home

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Income tax shelter in primary home

Tim Walsh
Saint Louis, MO · Member since 2016 · 5 posts · 0 votes
I have been reading up on not having to pay tax on gains from a investment property if you use those gains to buy more property. Is that still true if you take the gains and put them into paying down your primary homes loan?
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Brandon Hall
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
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@Tim Walsh as @Andy D. stated, the strategy of rolling your gains into a bigger or more expensive property is called a 1031 exchange (1031 is the code section detailing the rules). You can 1031 investment real estate into new investment real estate. 

However, you cannot 1031 exchange into a primary residence. You could exchange into a rental and then later make it your primary residence, but going straight into a primary residence will cause the exchange to be disallowed and taxes will be due on the gains.

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  • Andy D.
    Investor · Zürich, Zürich · Member since 2016 · 292 posts · 115 votes
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    Hate to brake it to you but two things in life are an absolute certainty: 1) death at some point and 2) paying taxes.

    You can only defer the payment of taxes (assuming you have exhausted all means of reducing the taxable income/gain as much as legally possible).

    You say you "have been reading up" on this. So you must have come across something that involves the numbers "1031", right?

    And as regards your question: of course you can use a gain to pay down a debt. That's a given, is it not? ;-)

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  • Brandon Hall
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
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    @Tim Walsh as @Andy D. stated, the strategy of rolling your gains into a bigger or more expensive property is called a 1031 exchange (1031 is the code section detailing the rules). You can 1031 investment real estate into new investment real estate. 

    However, you cannot 1031 exchange into a primary residence. You could exchange into a rental and then later make it your primary residence, but going straight into a primary residence will cause the exchange to be disallowed and taxes will be due on the gains.

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  • Andy D.
    Investor · Zürich, Zürich · Member since 2016 · 292 posts · 115 votes
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    @Brandon Hall Absolutely correct - of course. :-)

    @Tim Walsh I was teasing you a bit there.  ;-) Just to be clear: a gain is your money. What you do with it (for instance pay off a loan) is entirely up to you. What you were implying (at least this I have to assume as your question was not unequivocal), though, is whether you can use a gain and "make" it tax free (for the time being) e.g. via a 1031 exchange and then use these funds to pay off a loan on your primary residence (= non-investment). And that is, as Brandon correctly said, not possible from a tax point of view.

    You may want to read up on the basic rules of a 1031 exchange (plenty of posts about that here on BP, for example). One key point is "like-kind exchange".

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
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    @Tim Walsh, you can go the opposite direction however.  if you have lived your primary for 2 out of the previous 5 years you can sell it an take the first 250 (500K if married) in gain tax free.  You could use that money to pay down and investment property or anything you choose - tax free.  You can do this once every two years.

    As @Brandon Hall said you can combine the two sections 121 (primary residence) and 1031 (investment) and turn an investment property into your primary residence after a time as well.  There's some quirks to it and you just have to keep the two clear in your mind.

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  • Tim Walsh
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    Saint Louis, MO · Member since 2016 · 5 posts · 0 votes
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    Thanks for the details, very clear. I was thinking about the 1031 into my primary to help save on those taxes, but look like I just have to keep the investment going.
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