Do I pay Taxes Or Not.....(1031 exchange related question)

[Jorge Ubalde]

Good Morning Fellow BP Superstars,

  I have a question for you smarter dude/dudettes! 

I am selling/closing today on a property I bought back in March of 2010. The property was my primary residence for about 18 months, at which point I was relocated overseas (Dept of Defense) and consequently turned my primary home into an investment property late 2011. I  had every intention to live and use that residence as a primary prior to being relocated. Will I have to pay taxes on the proceeds of my sale?

If I am liable for taxes,  can I setup a 1031 exchange after you close on the sale of your property? As in days following the close? 

Thank you kindly,

Jorge 

[Clayton Mobley]

@Jorge Ubalde I'll just add a bit more detail to the answers you've gotten here so you know why you stand where you do.

So, as @Ann Bellamy rightly pointed out, you have unfortunately moved past the normal window for the Sec 121 primary residence CG exclusion. You need to have lived in a prop as your primary for two years out of the five years preceding the sale. Now, you only lived there 18 months, but since you were forced to move as a result of your employment you would likely have been eligible for some forgiveness on that front. However, since it has been so long since you moved, the most recent five year period has been all rental use, and your residency no longer counts.

HOWEVER, you said you had to move because of your work with the DOD. On your profile, it says you were/are a marine. Did you have to move on assignment with the military, or do you currently work directly with the DOD? If you were deployed with the military (or in an intelligence capacity with the DOD), there may be hope! 

Because the IRS understands that military personnel often have to move at inconvenient times, they offer an extension to the Sec 121 exclusion. If, because of your service, you did not live in the property during the past five years, you can elect to exclude the years of your service and extend the eligibility period by up to 10 years. So, for example, if you bought it in 2010 and then had to leave mid 2011 and were gone until now, you can elect to exclude the past 5.5 years while you were away and only count the time you were here. You still have not met the 2 year minimum and, I'll be honest, the IRS pub (https://www.irs.gov/publications/p523/ar02.html#en...) is not suuuuuper clear on whether or not the whole requirement is scrapped or if you still need to have lived there for 2 years even if you get to exclude your deployment time, all the examples include people who have met the 2 year req, just not the 5 year period. I would recommend that you seek out a CPA here on BP and ask about your specific situation.

You can find the specific IRS guidelines in the link above. In the table of contents under "Does Your Home Qualify for Maximum Exclusion" you can click on "Eligibility" to see how the 2 year/5 year rule works, and then "Does Your Home Qualify - Details and Exceptions" to learn about the military exception and what type of government employment qualifies.

Regarding the 1031, you've already had your answer. Sadly, you'd have needed to begin process prior to closing. If you haven't actually closed yet and still have some time, I'd contact one of the Qualified Intermediaries here to see if there's a way you can squeak it in under the wire. If you've closed or taken any money from the sale, however, you're out of luck. 

Hope some of that helps and that you're able to salvage some type of tax savings!

Best of luck!

Clayton