Can I Exchange Two Rental Homes for One?

Question

I'm wondering if anyone is an expert on or has experience with doing a 1031 exchange with two homes for sale at one time?  I have a condo in St Petersburg, FL, and a home in Northern Colorado and I'm wondering if I can postpone my gain by selling the two at the same time -  with the intent of buying one home in the Denver Metro area?  Who's a tax expert?

Bill Exeter · Answer

Hi Casey,

Yes, you can absolutely sell two (2) relinquished properties and acquire one (1) replacement property and qualify for tax-deferred exchange treatment under Section 1031.  The value of the replacement property must be equal or greater than the combined "net sale price/value" of the two (2) relinquished properties if you wish to defer all your taxable gain.

Joel Owens · Answer

Hi Casey,

As far as I know the 1031 exchange has nothing to do with how much money you make.

You are deferring all of the gain into  anew property or properties. Now if you do not 1031 and have capital gains then you have long and short term gains which do affect rates paid etc. and taxable income brackets.

If you could provide the specific new federal case law you are referring to then it would benefit us all if there are changes coming.

I am not an expert on 1031.

Casey Schultz · Answer

Correct, and thanks Bill.  We're confusing 1031 with capital gains rates.....1031 hasn't changed.  Capital gains rates have been graduated based on your income.

Also, with a lot of money invested in real estate @Joel Owens....Leaving it to my heirs may not be mine, or my clients first option.

Bill Exeter · Answer

Hi Casey,

I just wanted to jump in here and clarify the post.  You indicated "new 1031 tax laws."  There are new tax laws and tax rates, etc., but there are no new 1031 Exchange laws.  I didn't want other readers to be misinformed.

Mark Creason · Answer

Casey,

I used to live in Broomfield back in 1999-2000.  I think you can do an exchange.  Make sure if you are converting to a personal residence, that you understand the conversion rules.

Mark

Joel Owens · Answer

Hi Casey,

The exit strategy is generally leaving to your heirs in a "stepped up basis" where all of the deferment is wiped out.

So from what I can see nothing has changed with the 1031. You are talking about tax levels for long term and short term capital gains which you pay out based on how long a property is held if you are not going to do a 1031 exchange.

Casey Schultz · Answer

@louis Leone you are absolutely right.  If you exchange commercial property (including residential rentals) for property of the same value it is NOT a taxable event.  The recapture goes away in that case too as part of the 1031.  It's the exit strategy from owning rentals and commercial property that gets really tricky...There's some IRS case law on how long you need to rent a place before you can make it your primary residence.....but then you could eliminate $500,000 in gain as personal exemption (husband and spouse).

Louis Leone · Answer

Wow...I'm didn't realize that @Casey Schultz (guess you learn something new every day). Do you know where it says the dollar amounts in the tax code that refer to the 1031?  Didn't think it was considered a taxable event if new property was greater than or equal to previous property.

Casey Schultz · Answer

Add 11% for some State Tax and you are looking at substantial taxes on substantial gains.  Also, recapture is an issue.  Taxed at 25%!

Casey Schultz · Answer

Long-term capital gains and qualified dividends

A top rate of  15% applies to qualified dividends and the sale of most appreciated  assets held over one year (28% for collectibles and 25% for depreciation  recapture) for single filers with taxable income up to $406,750  ($457,600  for married filing jointly). Long-term capital gains or  qualified dividend income over that threshold are now taxed at a rate of  20%.

EXAMPLE: If a married couple  already has $457,600 of taxable income and an additional $100,000 in  long-term capital gains and qualified dividends, the entire $100,000  would be subject to the 20% rate. If, however, they only had $400,000 of  other taxable income, then $57,600 of the additional amount would be  taxed at 15% and $42,400 would be taxed at 20%.

Can I Exchange Two Rental Homes for One?

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