1031 Exchanges, Capital Gains, Personal Residence Questions!

1031 Exchanges
10yFollow

1031 Exchanges, Capital Gains, Personal Residence Questions!

John Carr
Investor · Chicago, IL · Member since 2015 · 19 posts · 3 votes

Hello everyone! I have a couple questions that I was hoping to get some feedback for, and any help/input from you guys would be much appreciated!

My situation: I own a SFH that was my primary residence from the time I purchased it in 2010 through November of 2013, at which point my wife & I moved and turned it into a rental. My understanding is that because this property was originally my primary residence, and because we lived in it for two years out of the previous five (Dec. 1, 2016 would be the deadline for the two out of five years) I can sell this property and not pay capital gains tax on the appreciation - however, I would owe the IRS recaptured depreciation for those years as a rental... so far, so good? Is my understanding regarding the above correct?

If so, moving on... Now - I understand the general concepts of a 1031 exchange (like-kind, 45-day ID window, 180-day closing window, etc.), but with my situation above would my property then be eligible for a 1031 exchange into another investment property? Would the IRS consider my SFH as an investment property, therefore allowing the "like-kind" exchange, or do I actually have to pass that two-out-of-five year mark before they would consider my current property purely an "investment" property?

(Perhaps) Relevant Info: This SFH has appreciated about $100K since I bought it, there is no mortgage on it, and my plan is to sell the property and take ALL of the money from that sale to put into a larger fourplex - whether I can 1031 it or not. I'm just trying to maintain the most amount of money from the sale as possible, and was hoping that this property is indeed eligible for the 1031 exchange.

ANY help at all would be greatly appreciated, and if anything that I *think* I already understand I am mistaken on, please feel free to point this out too! Thanks folks!!!

0Reply
25 views

5 Replies

Jump to latestLatest
  • David Hedges
    Investor · Crown Point, IN · Member since 2014 · 177 posts · 84 votes
    10y

    of what I understand of this, it sounds like unless you aren't able to sell by Dec 1, you don't need to worry about the 1031. The profit on it is low enough that you wouldn't need to pay any capital gains, and yeah, you do need to recapture the depreciation. 

    also, a sfh should be a lot quicker and easier to sell than a multifamily. 

    another option you have too if this is paid off is getting an equity line on it to free some of the equity from the property and use that to purchase the fourplex. Depending on the lender, I've heard of some going anywhere up to 90% LTV if they are the only lein.

    0Reply
  • Robert Hetsler
    Qualified Intermediary for 1031 Exchange" · Jacksonville, FL · Member since 2015 · 239 posts · 84 votes
    10y

    so if you have met the general guidelines of meeting the primary residence which, as a married couple, would allow the first 500K in capital gains to be excluded means that you should not even be thinking 1031 exchange.  However, if you are concerned for whatever reason there are issues on the requirements being met because you might not meet the primary residence requirements, you could still engage in a 1031 exchange.  That would provide you maximum protection but I do not think is really required in light of the facts. 

    Having said that, since you are planning to meet all the other requirements of a 1031 exchange, for the amount of money at hand as compared to the expenses of doing a 1031 exchange, I guess it would only afford you more protection than needed and you would certainly have all your basis covered. 

    Based on the above facts, I do not think you need to do a 1031 exchange but being that the house was investment property leading up to the sale, it is something worth giving some thought to as a traditional exchange is normally not that expensive and would afford you an additional layer of protection and we certainly can use any and all layers when it comes to the IRS sometimes!  Good Luck to you.  Let me know what you end up doing.

    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @John Carr:

    My situation: I own a SFH that was my primary residence from the time I purchased it in 2010 through November of 2013, at which point my wife & I moved and turned it into a rental. My understanding is that because this property was originally my primary residence, and because we lived in it for two years out of the previous five (Dec. 1, 2016 would be the deadline for the two out of five years) I can sell this property and not pay capital gains tax on the appreciation - however, I would owe the IRS recaptured depreciation for those years as a rental... so far, so good? Is my understanding regarding the above correct?

    Hi John,

    Based on what you have said, you are still in your three (3) year window in which you must sell and close on the sale in order to take advantage of the 121 Exclusion ($500,000.00 tax free exclusion).  You would not have to worry about the 1031 Exchange unless you do not sell and close on the sale within your three (3) year window. 

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
    WebsiteView Page
    0Reply
  • John Carr
    OP
    Investor · Chicago, IL · Member since 2015 · 19 posts · 3 votes
    10y

    @David Hedges

    @Robert Hetsler

    @Bill Exeter

    Gentlemen, thanks so much for your replies!

    I guess a more pertinent question would be in regards to what I WILL owe the government in terms of the recaptured depreciation, as I'm unfamiliar with these tax implications, and whether or not the cost of doing a 1031 exchange would ultimately save me money or not.

    Over the past two tax years, I have claimed in the neighborhood of $15,000 in the "Depreciation expense or depletion" box.  So I would only end up paying a percentage of that back to the government upon the sale, correct? If so, what would that percentage be (ballpark)?

    Also, what does the typical 1031 exchange cost? My only concern really is making sure I am able to maintain the most investment capital from the sale of my SFH...

    Thanks again!

    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    10y

    Hi John,

    The income tax consequences are now more complicated than they used to be.  You will have capital gain, depreciation recapture and Medicare Surcharge (Obamacare) taxes at the Federal level, which are dependent to a certain extent on your Adjusted Gross Income ("AGI"), and you may have taxes at the state level. 

    The cost of a 1031 Exchange is generally $700.00 to $1,200.00 on the west coast.  Our fee is $795.00 for one sale and one purchase. 

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
    WebsiteView Page
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free