Question for all my 1031 heroes

2 Replies

Let's say I sell a rental property (Single fam) at a profit and decide to do a 1031 to another single fam. Let's say it checks out and it qualifies as a like kind exchange. 

I then decide to live in the house and it ends up qualifying over time as a primary residence for tax purposes. I then sell the house. What happens to the 1031 gains?

Any thoughts you can add would be extremely appreciated.

I'm not in this situation right now, I just thought about it today and I'm curious. 

@Luka Milicevic, if you do a 1031 exchange and later convert that property to your primary residence then in order to take advantage of the primary residence exclusion the following terms must be met

1. You must have owned the property for at least 5 years.

2. You must have lived in the property for at least 2 of the 5 years prior to sale.

3. You will prorate the gain between the periods of qualified use (as primary) and non-qualified use (as investment)

4. You will have to recapture depreciation

So meet items 1 and 2 and if you've rented it for 2 years and lived in it for 3 years you would exempt 60% of the gain tax free.   And recapture all depreciation

Originally posted by @Luka Milicevic:

Let's say I sell a rental property (Single fam) at a profit and decide to do a 1031 to another single fam. Let's say it checks out and it qualifies as a like kind exchange. 

I then decide to live in the house and it ends up qualifying over time as a primary residence for tax purposes. I then sell the house. What happens to the 1031 gains?

Any thoughts you can add would be extremely appreciated.

I'm not in this situation right now, I just thought about it today and I'm curious. 

 If you don’t even intend to rent or hold for appreciation, then your 1031 is not  even valid on the first place. Your have to recognize gain. 

For you to qualify for 1031, you will have to rent or hold the property for certain time and later change to primary residence. 

Once it is your primary residence, to qualify for sec 121 gain exclusion when you sell it, you will have to wait five years from 1031( and need other requirements of 121). I don’t think your concern was section 121. 

Make sure you meet the timeline for 1031 exchange before converting it to personal residence. There is a rev ruling with 2 years safe harbor.  

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