Selling income property and purchasing a house

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Selling income property and purchasing a house

Joan Gerhardt
Austin, TX · Member since 2014 · 1 post · 0 votes

I sold the house I had been living in and used the money to purchase a house in Colorado that I intended to move into.  I didn't move in but decided to rent it while I lived in rental property in another state. It's now been five years and I want to sell the house in Colorado and buy one to live in where I have been living in Texas. I will probably sell the house in Colorado for about $70,000-75,000 more than what I bought it for since I bought it in 2009 when the market was very different from now.   I am trying to find a way to avoid paying Capitol gains tax on the income.  I understand that if you live in a house, sell it, and then reinvest in another home you do not have to pay this tax.  Does anyone know about rental property to home.  The sale of the home in Colorado would be about $300,000. I would be grateful for any advice.  

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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
11y

Hi Joan,

The property has been held as a rental property and therefore would qualify for tax-deferred exchange treatment under Section 1031 of the Internal Revenue Code. The challenge is that you want to acquire property in Texas that will serve as your primary residence. The properties sold and the property acquired must be held for rental, investment or use in a business in order to qualify for 1031 Exchange treatment. You could sell the rental property in Colorado and complete a 1031 Exchange by acquiring property in Texas that would be rented for a sufficient period of time in order to qualify for tax-deferred exchange treatment and then you could move into the property. Advisors

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  • Jean BolgerPro Member
    Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
    11y

    ouch. I'm not an expert, but I don't think there is any way to avoid capital gains tax on this sale (short of moving to Colorado for two years) Your intention upon purchase doesn't change the fact that it's been a rental for all five years. Do you have an accountant? You'll probably need one to figure what the gain would be- you'll have depreciation recapture as well as the price difference to account for. And just to add to the pain, Colorado has a 2% income tax on non-resident property sales over 100k.

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  • KEVIN FLYNNPro Member
    Investor · Warwick, RI · Member since 2014 · 38 posts · 10 votes
    11y
    Look into a 1031 exchange, also if you have lived there for even a short amount of time it could be considered your second/vacation home and taxed as a primary residence.
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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    11y

    Hi Joan,

    The property has been held as a rental property and therefore would qualify for tax-deferred exchange treatment under Section 1031 of the Internal Revenue Code. The challenge is that you want to acquire property in Texas that will serve as your primary residence. The properties sold and the property acquired must be held for rental, investment or use in a business in order to qualify for 1031 Exchange treatment. You could sell the rental property in Colorado and complete a 1031 Exchange by acquiring property in Texas that would be rented for a sufficient period of time in order to qualify for tax-deferred exchange treatment and then you could move into the property. Advisors

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
    WebsiteView Page
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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    11y
    Originally posted by @KEVIN FLYNN:

    Look into a 1031 exchange, also if you have lived there for even a short amount of time it could be considered your second/vacation home and taxed as a primary residence.

    I thought I should clarify the statement made above. A primary residence falls under Section 121 of the Internal Revenue Code.  It allows a homeowner who has owned and lived in their primary residence for at least 24 months out of the last 60 months to sell and exclude up to $250,000 in capital gains if they are single and $500,000 in capital gains if they are married from taxable income. 

    Second homes and vacation homes do not fall under Section 121 and are not taxed or excluded under Section 121 like the primary residence.  So, living there for a few months will not equate them to a primary residence. 

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
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  • Andy Collins
    SFR Investor · Dallas, TX · Member since 2011 · 604 posts · 243 votes
    11y

    I am a little confused why you would think you could get out of paying capital gains for a property that was held as an investment for 5 years...the IRS will also re-coop the depreciation you have taken over those 5 years at a certain rate (can't remember what it is exactly)

    Are you sure you want to sell the property, if its cash flowing it might be worth keeping it and buying a house on top of that one

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    11y

    Bill Exeter is absolutely correct on a great strategy for the patient investor to not just defer but actually eliminate the capital gains tax on a primary residence conversion - where you take a piece of investment property you have and "change it into your primary residence by moving into it.  Changing the use of a property does not trigger a recognition of gain bu Andy is correct also - there are two additional requirements added onto the other 121 requirements when converting a property that was previously the subject of a 1031 exchange.  You need to live in the property for 2 out of the previous 5 year period.  You need to own it for a minimum of 5 years, and you will have to recapture any depreciation taken during the time it was an investment property.  It takes patience but can still be an incredible profit maximizer.

    Another less messy option might be to sell the CO rental and do a 1031 into a TX rental. Then refinance the TX rental and take out the equity to buy a new primary residence.  You end up with two properties geographically close to you and have not triggered a tax event.

    Dave

    The 1031 Investor5137 Reviews
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