Is there a way to avoid tax on the gains of a sale from a rental property that has been bought through a 1031 exchange if you convert it to a primary residence for the last 2 years before the sale? For example, let's say I purchased an 8 unit in 1999 and rented it out for 10 years. I sold it in 2009 and rolled the gains from sale of that property into a very nice duplex through a 1031 exchange. I rented both sides of the duplex for 6 years, and in 2015, I moved into one side of the duplex for 2 full years. I want to sell the duplex now in 2017 and claim it as my primary residence, as I've lived here for 2 of the last 5 years. The total gains are not more than $500k. How much tax liability, if any, am I required to pay, according to current tax law?
@Leanne Roth , You sure can but it won't be as sweet as you hope.
1 First in addition to living in it for two years you also will have to have owned it for five years total.
2. You will only be able to get the primary residence exclusion on the half of the duplex you lived in. You would be able to 1031 the other half.
2. You will also have to prorate the exclusion between times of qualified use (as your primary) and non-qualified (as investment) use.
3. You will have to recapture depreciation as well.
In your case you rented it for 6 and then lived in it for 2 so you can take the 2/8ths (1/4th) of the gain from the primary side tax free plus you will recapture depreciation.
Thank you! This makes sense
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