renting out what was primary residence....1031?

Question

The scenario is this....Purchased a condo in Manhattan in 2006, it served as our primary residence until October 2014.

Since October 2014, we have been renting it out.

Basic question is...at what point, if any, would this property become "eligible" for a 1031 exchange.  There should be some substantial gains on the unit, both from appreciation and improvements so if there are ways to defer CGT if we should sell, that would be great.

I'd love to hear from any specialists here on BP.

Thanks!!!

Dave Foster · Answer

@Wayne Brooks and @Elizabeth  Colegrove are both correct.  Just to clarify, your window to get tax free money is a look back over the last 5 year period.  Did you live in and own the house for 24 months of the previous 60 months.  If so and you are single you may take the first 250K of gain tax free.  If you are married you may take the first 500K in gain tax free.  If there is more gain than that you may want to consider a 1031 exchange which will allow you to exclude from tax all gain but will only defer it into the next property.  Tax free is always better than tax deferred but tax deferred may be better than some tax free and some tax.  That is the calculation you need to make.

Elle Scott · Answer

@Dave Currence

@Bill Exeteris a great resource for these questions in case you'd like more information. I myself am learning more about how to leverage 1031 in the best way and have found his knowledge extremely helpful.

All the best!

Elle

Elizabeth Colegrove · Answer

in that case I deifnitly recommend the 1031 it can be a great resource in those instances. I have a few articles on that subject feel free to pm me if you want the link ;)

Wayne Brooks · Answer

Sell now, or before Oct 2017, and you get the primary residence exclusion....Capital Gains Tax Free ($250k if single, $500k if married).  Better than tax Deferred 1031 later.

Dave Foster · Answer

@Un chu R., The difference between 500K and your net sales price will be your target purchase amount in order to maximize benefit and minimize tax implications.

Example - You want the maximum benefit from your primary residence exclusion of $500K. So you plan on taking 500K in boot from your 1031 exchange.  If your house sells for 1.2 mil then normally in order to to defer all tax you would need to purchase 1.2 mil in real estate.  But in this case you are planning to take out 500K as boot so your reinvestment target to avoid tax on the rest of the sale would be 700K.  The 500K in boot is covered by your primary residence exclusion and whatever remaining profit is tax-deferred inside the 1031.

As @Dan Schwartz said make sure you've got your cpa prepared for this.  It's not an uncommon scenario but they should be involved with the planning.  Also remember that the 1031 has to be in place before you close the sale of your old property.

Dan Schwartz · Answer

@Dave Foster's plan is the best one   Just be sure to work with the CPA who will file your tax return FAR in advance of this transaction. Not any CPA, but the one who is going to sign the return. You don't want to go through this transaction only to find out - for some odd reason - that you will not be able to take the 121 exclusion. Because if that were to be the case, you would have turned $500K in tax-free gains into $500K of tax-deferred gains. Big difference. Seriously, map out the appropriate IRS forms and make sure that everyone is on board with what you want to do. Then do it and enjoy the gains!!

Dave Currence · Answer

Wow, Dave. I would never have realized that combining the benefits was even an option. I guess I always assumed it was a "one way or another situation". Thank you very much for that.

I'll have to keep that ticking clock in mind too when we think about this.

Great information!

Thanks

Dave Foster · Answer

@Dave Currence I just saw your reply to Elizabeth and wanted to piggy back on one other opportunity you have.  Since your gain is likely to be over 500K and since it is an active rental investment property now and since you have lived in it for 2 out of the previous 5 years you could also with your CPAs blessing combine all.  Do a 1031 exchange for the entirety but hold out whatever it is you would like up to $500K and take that as boot in the exchange.  Maybe this is a 900K property with a 500K loan on it.  You could buy a property for 400K cash in the exchange and consider the remaining 500K as boot.  When you file your taxes you apply your sec 121 exclusion to the 500K in boot that would normally have been taxable.  So you end up with a new investment property free and clear of debt or you end up with tax free cash in your pocket and all remaining tax deferred into the new property.  Right now you have the advantage of a wonder confluence of situations.

Dave Currence · Answer

Thanks, Wayne

we would be able to take a 500K deduction, as we are married, filing together.  The gains would very likely be greater than that, thus why I was originally interested in all the options available.

Thanks again for your reply!

renting out what was primary residence....1031?

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