Combine Home Sale Gain Exclusion with 1031 Exchange

[Eugene Cheng]

Hello BPers,

Question about combing a home sale gain with a 1031 exchange. My wife and I lived in our prior single family home for 9 years until 2017 then rented it out since (+2 years). The house has appreciated about 800k. We are curious if we can do a 1031 exchange but also claim the 500k home-owner deduction.  For example, assuming it is exchanged to a MFH of the exact same price. Can I get 500K cash in my pocket and only keep 300k gain in the replacement property. If so, how does the sale proceed work with QI?  

I read an article about this https://www.bradyware.com/combine-home-sale-gain-exclusion-with-like-kind-exchange/  but it does not answer to my specific question.

Thank you

[Dave Foster]

@Eugene Cheng, then boy is it your lucky day!  This is an investment property so eligible to do a 1031 exchange.  It was your primary residence for  2 out of the 5 years immediately prior to the sale then you would be eligible to take the first $500K in gain tax free as a married couple.  So this property qualifies for both.

The mechanism we'd use with you is to sell the property and do a 1031 exchange.  But you would take $500K in boot.  Normally this boot would be taxable but since you qualify for the 121 exemption your accountant files the appropriate form with your tax return and that $500K is tax free.

Meanwhile the remainder of the gain ($300K ish) and all depreciation recapture go into the 1031.  

So yes you get to put $500K in your pocket tax free.

From a reinvestment perspective let's just say that your basis was $400K.  It appreciated $800K so you sell it for 1.2 mil.   You would take $500K in boot and would then need to purchase at least $700K of real estate using the remaining proceeds in order to fully defer the rest of the tax.

An awesome strategy!  Congratulations