Question about 1031 and 121 exclusion

7 Replies

I have a question for tax experts out there. Let’s say I did a 1031 exchange and chose a replacement property worth 100k, fully paid with cash from the exchange. Then I rent this property to my son and after two years time, added his name onto the property title. Once his name is added, can he sell it and claim the full 121 exemption for taxes (of up to 250k for single people), since he’s lived in the place for two years and it’s his primary residence? Or would this not be valid because me and my husband’s names are also on the title?

If this isn’t possible, is there any other way that I can let my son become an owner-occupant of this property so that he can claim 121 exemption when it’s sold?

Originally posted by @Debbie Cost :

I have a question for tax experts out there. Let’s say I did a 1031 exchange and chose a replacement property worth 100k, fully paid with cash from the exchange. Then I rent this property to my son and after two years time, added his name onto the property title. Once his name is added, can he sell it and claim the full 121 exemption for taxes (of up to 250k for single people), since he’s lived in the place for two years and it’s his primary residence? Or would this not be valid because me and my husband’s names are also on the title?

If this isn’t possible, is there any other way that I can let my son become an owner-occupant of this property so that he can claim 121 exemption when it’s sold?

 1) Make sure you are taking to professional. Form what you have wrote, looks like you want to sell old property first, then get the cash and use that cash to buy new property. 1031 exchange does not work that way. You cannot receive any cash. You will just replace your old with new one with the help of QI. So talk to @Dave Foster

2)Rregarding adding your son to the title, you are basically gifting him the property. He needs to own 100% of the house if he wants to shelter 100% of the gain. So you would be gifting him the entire houses do  Mon and dad would not be in the title of the property.  If you have not gifted more than 22 Million previously, you don’t owe  any gift tax, but you will file a gift tax return. 

And yes, the renting and ownership doesn’t need to be concurrent but he cannot sale the house right after you gift it to him. He needs to own it for two years. 

Bottom line: he needs to own the property for sec 121 exclusion, you will gift it to him and sell after two years. 

@Ashish Acharya

@Ashish Acharya

I apologize, I may have been using the wrong terminology, but yes, I meant just doing an ordinary exchange that does not have a mortgage attached.

Do you mean that I would have to rent it out to him for two years, give it as a gift, and then he has to reside there for an additional two more years? Or can his first two years of renting the property count towards the owner-occupant length requirement?

Originally posted by @Debbie Cost :

@Ashish Acharya

@Ashish Acharya

I apologize, I may have been using the wrong terminology, but yes, I meant just doing an ordinary exchange that does not have a mortgage attached.

Do you mean that I would have to rent it out to him for two years, give it as a gift, and then he has to reside there for an additional two more years? Or can his first two years of renting the property count towards the owner-occupant length requirement?

The renting doesn’t count towards the onwership. He need to own the property for two years. So, after the gift, he needs to own the property for two years. 

@Debbie Cost  

I'd talk to a tax pro- there are always parts we don't know 

There are two rules and they don't need to be the same time frame. Own AND occupy for 2/5 years. 

So your son would need to Occupy for 2 years (his time renting it during that time frame would count) 

And also own it for 2 years. 

SO renting would meet the occupy test, but not ownership. 

If you gifted to him at the end of 2 years to meet the 1031 requirements...he would then need to wait 2 years from that point to qualify. 

He could choose to move out for those second two years though, and rent it to someone else. He just needs 2 years of occupancy and ownerhsip. 

Originally posted by @Natalie Kolodij :

@Debbie Cost 

I'd talk to a tax pro- there are always parts we don't know 

There are two rules and they don't need to be the same time frame. Own AND occupy for 2/5 years. 

So your son would need to Occupy for 2 years (his time renting it during that time frame would count) 

And also own it for 2 years. 

SO renting would meet the occupy test, but not ownership. 

If you gifted to him at the end of 2 years to meet the 1031 requirements...he would then need to wait 2 years from that point to qualify. 

He could choose to move out for those second two years though, and rent it to someone else. He just needs 2 years of occupancy and ownerhsip. 

That's good to hear, I didn't know that was allowed! So as long as he doesn't sell the place before the end of this four year period (two years renting, then two years ownership but renting it out to someone else), then he'd be fine? Is this what you meant by owning and occupying not having to be during the same time frame @Ashish Acharya

Originally posted by @Debbie Cost :
Originally posted by @Natalie Kolodij:

@Debbie Cost 

I'd talk to a tax pro- there are always parts we don't know 

There are two rules and they don't need to be the same time frame. Own AND occupy for 2/5 years. 

So your son would need to Occupy for 2 years (his time renting it during that time frame would count) 

And also own it for 2 years. 

SO renting would meet the occupy test, but not ownership. 

If you gifted to him at the end of 2 years to meet the 1031 requirements...he would then need to wait 2 years from that point to qualify. 

He could choose to move out for those second two years though, and rent it to someone else. He just needs 2 years of occupancy and ownerhsip. 

That's good to hear, I didn't know that was allowed! So as long as he doesn't sell the place before the end of this four year period (two years renting, then two years ownership but renting it out to someone else), then he'd be fine? Is this what you meant by owning and occupying not having to be during the same time frame @Ashish Acharya

Correct. 

The rule is just that you must own it for 2 years of the last 5. 

You also must occupy it for 2 years of the last 5. 

They do not need to be the same 2 years.