How Can I Sell A Home in San Diego Without Paying a Huge Tax Bill

[Lindsay West]

My aunt has a home in San Diego that she bought in 1987. Now, she's getting ready to retire and move to Florida. It's been her primary residence for more than two of the last five years, but it has also been an investment property for the last year and a half while she's been stationed overseas. She's looking at a significant tax bill when she sells the property. I know the first $250k is tax exempt on a primary residence. I've also talked to her about doing a 1031 exchange. But I was wondering if it's possible to use both of these strategies to mitigate the tax burden. Is this possible? Or does a property have to be either a primary residence or an investment property for tax purposes?

[Dave Foster]

@Lindsay West, Yep @Wayne Brooks and @Michael Plaks  nailed it.  She can take full advantage of the 121 primary residence exemption and take $250K of the profit tax free.  She can also do a 1031 exchange on the remainder and that profit will be tax deferred.  

The mechanism is that she will do a 1031 exchange and take $250K in boot.  Normally that boot would be taxable but because she qualifies for 121 that will offset the boot when you do her taxes next year.

the tax free money she can do what she wants with.  The investment portion must be used to buy investment property - whether fixed or fractional.

One other thought would be that if she is moving to FL she may want to make sure that her replacement property for the 1031 is also in FL or another state that has no state tax. Since as a FL resident she will have no state tax she'll be able to boost her ROI significantly if her business assets are in a tax advantaged state as well.