Tax deferred transaction between personal and investment property

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Tax deferred transaction between personal and investment property

Michael Wolffs
New York City, NY · Member since 2014 · 155 posts · 41 votes

I own a personal residence with A LOT of equity.  I'm single, so if I sell it I can avoid tax on $250K of cap gains, but there would be significantly more than that.  If I sell the property, and roll the proceeds into a large mulitfamily that would cost more than the gross sales amount of the residence and absorb all the cash coming out the sale, can I defer the entire tax liability of the sale?  Would it matter if I subsequently lived in the new property or not?  If allowed, would this be considered 1031 exchange and have to be performed under the 1031 rules?

Any information appreciated.  Thanks.

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  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    8y

    1031 exchanges aren’t for personal residences. 

    1Reply
  • Michael Wolffs
    OP
    New York City, NY · Member since 2014 · 155 posts · 41 votes
    8y

    There is a tax provision for rolling tax liability forward from a primary residence (don't know the chapter reference).  There is a provision for rolling forward the tax liability from an investment property (1031.)  The question is, can these be crossed?

    0Reply
  • Michael Wolffs
    OP
    New York City, NY · Member since 2014 · 155 posts · 41 votes
    8y

    Okay, did some digging.  Apparently I'm wrong.  They got rid of the roll over provision for primary residences in 1997.  It changed to a blanket exclusion of taxation on the first $250K or $500K (single / married.)  So I guess the whole question goes away.

    Sorry.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Michael Wolffs, Aw, don't give up so easy!  There is a way to combine the two but it takes a little patience.  Sec 121 deals with your primary residence.  Sell a property you've lived in for 2 out of the 5 years prior to sale (beware there is a change in the works to make this 5 out of 8) and you get to take the first $250K of gain (if single) tax free.

    Sec 1031 is for investment property.  Sell a piece of property that you hold for investment purposes and you can do a 1031 exchange and buy new investment property and defer payment of the tax indefinitely.

    If your were to move out for a year or two and rent it that converts the property from your primary residence and into an investment property.  At that point you can do a 1031 exchange and you would also get the $250K tax free because even though it is currently investment property you still qualify for sec 121 by meeting the residency requirement.  The only tax you would owe would be the depreciation recapture during the time it was a rental.

    A little patience can go a long way.  The only joker in the deck is the amount of patience it will take given the status of the new tax reform bill.

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  • Michael Wolffs
    OP
    New York City, NY · Member since 2014 · 155 posts · 41 votes
    8y

    @Dave Foster

    Okay, that's interesting.  I could possibly make it work, but not sure I'd want to.  There would be issues with renting the primary residence (it's an NYC coop apartment, so there is a sublet fee.)  It also means I need to wait a year or more to get that capital into action (well, I could get a equity line, maybe.)

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