Residential into rental to 1031?

Question

I searched all of the questions on the forum and couldn’t come up with an answer to this one...

My husband and I own a house as our residence but are building another house and are going to turn the current one into a rental.

Curious how long we have to hold it as a rental before we can use it in a 1031 exchange. We have about $50k equity, which we would rather invest in something that cash flows better.

I have also done numerous google searches trying to find this answer and I just can’t seem to find the answer. Any help would be greatly appreciated!!

Wayne Brooks · Answer

@Cindy Harney

The main question would be Why?

1) popular opinion  says you’d need to keep it as a rental for 1-2 years before doing a 1031......but, you would Not want to do this unless the property was a rental for years Before it was your primary, because.....

2) as your primary residence, you can sell and any gain is Exempt from taxes, up to $500k in gains for a married couple, irs section 121. There is No requirement to buy another primary or reinvest the money.  If you owned it as a rental Before it was your primary, you only get a pro rata exemption.

You Can retain it as a rental for Up to 3 years, and still receive the exemption, If you want to.

Dave Foster · Answer

@Cindy Harney, The requirements to sell your primary residence and get the first $500K of profit tax free are that you must have lived in the property for 2 out of the 5 years immediately prior to sale.  So you will be able to rent that property for up to 3 more years and still qualify for the primary residence exclusion.  So you do have a wide range of time to evaluate and establish your intent before selling.

Cindy Harney · Answer

@Dave Foster thank you so much! That’s likely why I couldn’t find a specific answer. I’m a rule follower, so I was searching for a rule! That’s great to know! We already have a 6 month tenant lined up while they build a house and possibly a year tenant after them, but we would much rather invest in something that has a better return so we may just sell after the 6 month guys move out. I appreciate you sharing your knowledge!

Dave Foster · Answer

@Cindy Harney There is no statutory holding period. That’s why you can’t find the answer:).

Your intent must have been to hold for investment use.  But that is the standard-your intent.  Most folks feel comfortable at anything more than a year.   It there could always be situations where a shorter (or longer) hold period might be approprriate.

Sam Shueh · Answer

Talk to your CPA first.

Wayne Brooks · Answer

@Cindy Harney Well, how much profit after all....closing costs, commissions, fix up costs, etc.?  While the costs of a 1031 aren’t much extra ($1000 or less) considering the timeline/pressure to buy a replacement property right away, you may just want to pay the taxes, if they are not substantial.

Cindy Harney · Answer

@Wayne Brooks we just bought it last June so it only served as our primary residence for a year. Therefore the profits would be subject to long term capital gains.

Residential into rental to 1031?

Most Popular Reply