Taxes on a break even sale?

Question

I sold my primary residence/investment triplex last August 2022 and purchased a property through a 1031 exchange. I used $250k (personal exemption for the primary residence portion of the sale) and then $250k (in the 1031 exchange account) to complete the sale. If it matters, the process of evicting squatters for the last 6 months has drained any motivation I had in rehabbing the property and just want to invest out-of-state. I have 3 questions…

- Are there taxes on the sale if I break even?

- Do I have to do another 1031 exchange on the entire $500k?

- Can I get the $250k that was the personal exemption back without being taxed?

- Are there taxes on the sale if I break even?

- Do I have to do another 1031 exchange on the entire $500k?

- Can I get the $250k that was the personal exemption back without being taxed?

Shireen Y. · Answer

Ok, got it. Thank you all for the responses. Much appreciated!

Basit Siddiqi · Answer

The $250,000 exemption should not have been put into the 1031 exchange escrow account.Your accountant will know what the basis is in the property right now which will determine what the gain would be if you were to sell the property.Best of luck.

Kevin Sobilo · Answer

@Shireen Y., I'm not a tax accountant but I think I can give you some answers to help you make a decision.

First, off you will have taxes because of the 1031 exchange you already did! The 1031 exchange, didn't eliminate taxes, it deferred them. So, if you sell you have to recapture that $250k from the 1031 exchange and pay tax on that.

Also, since you put the property into service, it would have been depreciated on this year's tax return (whether you took the deduction or not). So, your tax basis would be further lowered.

So, even selling at a break even point would have you paying taxes on a substantial amount unless you use another 1031 exchange.

Wayne Brooks · Answer

@Shireen Y. YOUR CPA can tell you best, since they have all the numbers from your tax return.

But, don’t confuse “cash received from a sale” with “profit/taxable gain”. Your 121 exemption is already filed for and done, it won’t be taken back.

Simply put, once you simply sell a property you acquired by 1031 you pay tax on any gains on That property And you pay taxes on the gains from the previous property that you Deferred when you did the 1031….they both get added together now.

Dave Foster · Answer

@Shireen Y., If you deferred tax into that property through a 1031 exchange that did not go away.  So even if you sell that house for what you bought it for you will still owe the tax you originally deferred with the first 1031 like @Kevin Sobilo said.    You will probably need to do a 1031 exchange again.

Chris Picciurro · Answer

Good morning @Shireen Y. - if you "break even" there is no tax due. That said, tax flow vs. cash flow meaning you need to properly determine your cost basis in figuring a "break even" point. The primary residence exemption is referred to as Section 121 exclusion. You would need to use the property as a primary residence for at least 2 years (unless an rare exception is in play). If you want further guidance feel free to DM me. Have a great day.

Taxes on a break even sale?

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