1031 considerations

[Taylor Witt]

4 years ago I purchased my first house in which I lived in, and for the past 1.5 years I have rented it out. My long term goal is to own enough properties where I can make this my full time job. I would like to work my way into multi-family houses as well as some apartment complexes. I owe 180,000 on a property that is worth 250,000. I want to know when it makes sense to do the 1031 exchange. What would the long term tax and depreciation implications be if I kept exchanging my way up to an apartment complex?

[Dave Foster]

@Taylor Witt, The exclusion for the primary residence sale has a 5 year look back so as @Robert Hetsler said you must have lived in it for 2 out of the 5 years prior to sale.  So in your case wanting to take advantage of appreciation and cash flow, you could rent that house out for another 1.5 years and still take the full 121 exemption when you sell.  The dates are very specific so watch your calendar closely so that your sale occurs within the 60 month where you can say you lived in it for 24 of those last 60 months.

There is one motivation to do a 1031 rather than take the primary residence exclusion.  @Duke Marquiss,  your take on perspective on cash free vs tax deferred is right on but your information on depreciation is not correct.  If you take the primary exclusion on a property that you have used for rental for 3 years you will have to  recapture all depreciation upon the sale.

If you do a 1031 then all tax on gain is deferred and basis is carried forward so depreciation recapture is deferred as well.  It's probably not much compared to the tax free aspect.  But, if you're only going to use the money to buy more investment property you may think about the 1031 to also avoid depreciation recapture.