1031 + 121 Non-Qualified Use

3 Replies

We have a property acquired in a 1031 exchange, which we rented out for 2 years and then converted to our primary residence. We are approaching year 5 of ownership and plan to sell eventually, but not sure of the tax implications of renting out again before selling. I know the first 2 years of this scenario are non-qualified years for the 121 exemption, but if we move out and rent again, will these following years be qualified or non-qualified?

So, if we sell at year 5, I know we can exempt only 3/5 of the capital gain.  But, say we sell at year 8 after moving out and renting three more years...would we be able to exempt 3/8 or 6/8 of the capital gain?   There is almost $500k in cap gains on this property, so I need to get this right. :-)

Originally posted by @Mark Caragio :

We have a property acquired in a 1031 exchange, which we rented out for 2 years and then converted to our primary residence.  We are approaching year 5 of ownership and plan to sell eventually, but not sure of the tax implications of renting out again before selling.  I know the first 2 years of this scenario are non-qualified years for the 121 exemption, but if we move out and rent again, will these following years be qualified or non-qualified?

So, if we sell at year 5, I know we can exempt only 3/5 of the capital gain.  But, say we sell at year 8 after moving out and renting three more years...would we be able to exempt 3/8 or 6/8 of the capital gain?   There is almost $500k in cap gains on this property, so I need to get this right. :-)

Rental periods after moving out is exempt from non-qualified use. So no, essentially 3 years after you move out is not non qualified.  Also, you want to wait 5 years after 1031 to qualify for 121, looks like you are already doing that. 


 

@Mark Caragio , I think @Ashish Acharya 's analysis almost feels like bad news to you as it might push you over that $500K limit - what a nice problem to have. :)

If you do go over that $500K limit and if you want to also defer recapture of the depreciation you can always combine a 1031 exchange with the 121 exemption. Since you qualify for 121 by having lived in it for 2 out of the previous 5 and since you qualify for 1031 because it is being used as an investment you can take advantage of both sections of the code.