Legal to move into my 1031 exchange- Safe Harbor clarification- capital gains

[Rachael K.]

Hi, I was hoping to get some clarification on the Safe Harbor law.  We are considering moving into our 1031 property and making it our primary residence.  We have rented it out the past 3 years. What happens with the capital gains taxes if this is done ... do they just disappear forever or will I only ever need to pay them if I sell this house?  Is it possible to transfer this 1031 to another property of mine?  

[Dave Foster]

@Rachael K., Indeed.  CA will want to collect the portion of the tax due while the property was in CA.  This is why you have the annual reporting requirement when you have 1031'd out of state.  

Much of this will be mitigated in the proration of the gain that you will get tax-free.  It is important to note that the information provided by the other poster above is only true when you purchase the property first as your primary residence. It is not accurate in a conversion situation. If you are converting a property from investment to your primary residence then you only get to prorate the gain between the years it was investment and primary.  and when you convert from investment to primary and the property you are converting was part of a 1031 exchange then you also have the 5 year holding requirement.  And don't forget you will have to recapture depreciation.  And of course then CA will get its share :)