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1031 Exchanges
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Updated over 2 years ago,

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2
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1
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Matt Ess
1
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2
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Turning primary to rental as pre-plan for future 1031 exchange

Matt Ess
Posted

Hello experts on the 1031 topic,
I have searched many posts on this forum and have found lots of great info on 1031 exchanges.   I have learned A TON, however I don't believe I found the right answer to my particular situation.  If anyone could help with my questions I'd greatly appreciate it.

My particulars are:
Currently I own a primary residence for 12 years ($100K left on the mortgage). 
Homestead exemption currently claimed with County tax authorities (Hillsborough County, Florida).  
Deed in my own personal name. 
I occupy it but not very much...I mostly stay at my girlfriend's house so even though the house is my primary residence, in reality I stay there maybe a day or two each week... most of the time I'm at her house.

My Situation and plans:

IF I sold outright - I would be hit with a Huge Capital Gain - gain of roughly $650K (give or take a few K) based on projected current value per consult with a realtor. 
From all the reading I've been doing, I understand that I cannot do 1031 exchange on primary residence.  Section 121 exemption of $250k (for single person) helps WAY TOO LITTLE ...and not a good option for me for Capital gains tax I would be face with.   
I don't NEED to sell (no financial or other dire circumstance), but aspire to UPGRADE to nicer / waterfront / dream / forever home.  We are not ready to marry yet, and file jointly, and whatever other requirement just to take advantage of the bump up to $500K on Section 121.   Even with $500K limit, I would still have cap gains tax on roughly $150K, which of course the point here is to avoid. 

However, I DO WANT TO PLAN and preposition myself /us for a future 1031 sale with no Capital gains tax.  SO..... My plan and intention is to move in with my girlfriend and turn my current primary residence into a rental / investment property (either short term AirBnB type or traditional lease) for at least a year (or bit longer) to where I'm qualified for 1031 exchange.   After renting for such time frame, I'd like to 1031 exchange it for an replacement property that will be an UPGRADE to this dream / forever home for our future.   I would rent the replacement house for the satisfactory period to cover myself on the 1031 rule, but eventually would want turn it into my primary dream home.  In all my reading I believe this plan of action would make it "kosher" on the 1031 rules with favorable outcome on my Capital gains taxes ... but I'd love to hear all of your feedback, pros, cons or any pitfalls with my approach. 
While all of this is going on, I would just live with my girlfriend at her place.  Then, eventually move into the said DREAM home, and rent out her house instead.

My questions are:

1.  For the house which is currently my primary residence - Do I rent the current primary as a rental for 1 year or 2 years to be eligible for 1031 exchange?   I think I've read that 1 year is enough after owning it for 12, but I'm not 100%.
2.  For the house which is currently my primary residence - Do I need to change the homestead exemption with the County Appraiser's office when I start renting it out??
3.  ...MORE IMPORTANTLY... Is #2 required for 1031 exchange rules with IRS that the primary becoming a rental is not categorized with a homestead exemption with the County?   In my scenario, I will not have another homesteaded property if I'm living at girlfriend's house and would hate to lose the exemption discount on the County property taxes.
4.  Do my plans of turning the primary into a rental, followed by 1031 exchange into replacement rental, then later turn replacement to a primary something that would trigger issues with IRS regarding capital gains taxes?
5.  Would my current (primary) house be eligible for 1031 exchange AFTER a year of renting it - if it's a Short Term Rental (VRBO, AirBnB or alike) versus a traditional monthly type lease agreement?
6.  Can Stock / Equities sold at a loss be used to offset Capital Gains on sale of my primary property instead of going through all of my above pre planning for a future 1031 exchange ??

7. And as a Wild thought for a Bonus :) ...... To meet classification as investment / rental property to qualify for future 1031 sale -- What if I just live at my girlfriend's and sit on the house without renting it ??? e.g.: Attempt to rent it, but NOT actually rent it out. I could post it "For Rent", get applications from prospective tenants, but not approve anyone as a tenant and just carry the mortgage for a year. Of course, I'd retain all "for rent" postings, tenant applications as proof of "intent". Would that pass muster for no Capital Gains tax upon future 1031 exchange ??? Would that be enough to show "intent" of renting as an investment property? ... OR... do I need actual signed lease with a tenant, utilities on the property in tenant's name instead of mine, and/or actual rental income being produced and claimed on my taxes for the year (...or alternatively, AirBnB listing if I went STR with income or invoices/receipts from AirBnB records ??? ).

I realize it's a lot of questions, but hopefully there are few folks on here who can help me AND Other Readers navigate through the 1031 waters and intricacies related to preservation of cash with capital gains tax.

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