Can this still be considered a primary residence property?

Question

I purchased a primary residence property with another co-owner in NYC in 2016. The mortgage loan is 100% under my name. 2 years ago, I moved & converted the property to an investment property, and purchased another primary residence property in Georgia. Now I am in the process of selling the NYC property. I came to know about 1031 a month ago.

Now that I am selling the NYC property, I have questions about taxes, etc.
Can the NYC property still be considered a primary residence property since I live there for more than 2 years?
If it is considered as a primary residence, I don't have to worry too much about taxes. According to the Taxpayer Relief Act of 1997, there are 250k or 500k capital gain tax exemptions based on marital status.

If it's considered as an investment property, then I'll need to prepare to do a 1031 exchange. My question regarding the 1031 exchange is that since the house was deeded between the co-owner and me and the mortgage is 100% under my name, how much $ amount properties I should be looking for as the 1031 exchange? Is it 100% of the NYC sale amount or 50%?

PS: I was young and naive and got tricked into co-owning the property while putting the mortgage 100% under my name. I didn't know much about taxes etc in the past. :(

Bob Norton · Answer

@Wensheng Chen You can exclude the gain on the sale if you lived in the property 2 out of the past 5 years. It sounds like you are on the edge of that time limit, so it will come down to actual days to consider.  You and your co-owner will split the gain, unless the co-owner has quit-claimed their interest to you.  Did you have an agreement that the mortgage payoff will be split between both of you?

Who is on the mortgage doesn't matter as much as who is on the title.  The mortgage company will not release the title until the mortgage is paid off anyway.

For the 1031 exchange, if you are both considered tenants-in-common, then you would be exchanging your 50%.  If you are considered partners and filed as a partnership for the rental, then you both may have to purchase the new property together.  You should speak with a 1031 exchange specialist like @Dave Foster to get the particulars on that situation.

Dave Foster · Answer

@Wensheng Chen, Yes, if you have lived in that property for 2 out of the previous 5 years then it would qualify for the $250k/$500K exemption.  As @Bob Norton said it doesn't matter who is on the mortgage.

If both of you are on the deed that might limit your exemption.  And if they have not lived there then they would need to do a 1031.

Wensheng Chen · Answer

@Joe Splitrock, we pay 50% for everything and we are both on the title.

Joe Splitrock · Answer

@Wensheng Chen you can take the tax free gain every two years and you can do that multiple times over your life.

As far as the two owners, each person can qualify individually for the $250k gain exclusion, provided each person lived in the property for 2 of 5 years as their primary residence.

As far as splitting the gain, it would generally be after mortgage payoff. There could be other factors too. Did you both pay equal amounts of the mortgage when living there? Did you both pay equal portions of the down payment, repairs, utilities, etc? If one person paid more of these costs, they may be entitled to a higher portion of the profits.

Another question is who is listed on the title of the property? Obviously you are, but is the other person on the title?

Dave Foster · Answer

@Wensheng Chen, You can only access the exemption once every two years.  However you must have lived in the property for 2 out of the 5 years immediately prior to selling it.  You do not have to own it for 5 years.

Anyone who owns that house, lives in it as their primary residence and meets the requirements is entitled to the primary residence exemption.  If they are not using the. house as their primary residence then they may be able to do a 1031 exchange.

Wensheng Chen · Answer

We don't have any agreements on the mortgage payoff. "split the gain" should be after all the mortgage is paid off right?

Since there are 2 owners (not spouses), can we both claim 250/500k exemption? Or how does it work in my case?

From investopedia

KEY TAKEAWAYS

• - You can sell your primary residence and be exempt from capital gains taxes on the first $250,000 if you are single and $500,000 if married filing jointly.
• - This exemption is only allowable once every two years.
• - You can add your cost basis and costs of any improvements that you made to the home to the $250,000 if single or $500,000 if married filing jointly.

Trying to understand this a little better for my investment knowledge. I need to live in the property for 2 years, but do I need to own the property for 5 years to qualify for the exemption? Say for example, given the following scenario:

1. in 2016, I purchase my first property and live there for 2 years

2. in 2018, I purchase the second property and live there for 2 years as well

3. in 2020, I purchase the third property and live there 2 years also

4. 5 years after I purchase the first property, in 2021, I sell the house and claim the 250/500k exemption

5. 2 years after I purchase the third property, in 2022, I sell the house. Can this house be exempted again?

6. 5 years after I purchase the second property, in 2023, I sell the house I purchased in 2018. Can I claim the exemption on this also for another 250/500k?

Basically, is the exemption every 2 years up to the first 250/500k (like a lifetime threshold)? Or is it the first 250/500k capital gain every 2 years?

Can this still be considered a primary residence property?

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