do 1031 exchange into a passive income investment.

[Account Closed]

We have a property in southern California that we lived in for 9 years, but was a rental for the past 7. We want to sell it and would like to buy a primary residence in the next 2 to 3 years where we live now (orange county or somewhere else in case we move). Should we just pay capital gains and invest the money from the equity? do we have to pay capital  again if we sell the investment in 2 or 3 years? I read about the 1031 exchange, but we don't want to buy property now. We just want passive income without any hassle or stress. I saw the DTS, but how does that work if we still have a mortgage for half the purchase price and can we sell the DTS whenever we want (2 to 3 years). Can someone explain like you would to a child. I read the posts about DTS and didn't understand how that works.

[Dave Foster]

@Account Closed, the property you have now does not qualify for any capital gains exemption.  So your only option would be to do a 1031 exchange.  But that does raise some possibilities.

1. You could wait for a year or so and then sell the property, do a 1031 exchange and buy another property (a really nice property that you'd like to live in but will use for investment).  Once you've owned that 2nd property and used if for investment for a year or two you can change the use without causing a tax recognition and move in.  In this way you are sheltering the capital gains and still using 1031 to buy your primary residence.  But you do have to exercise some patience before you move in.

2. I think you may be referencing a Delaware Statutory Trust (DST) - These are fractional ownership of a much larger asset. They do qualify for 1031 treatment and they can accept your debt if you're an accredited investor. I don't know if their hold requirements would work for you. But I'll let the DST folks speak to that. In both cases you must do a 1031 exchange in order to defer the capital gain tax and depreciation recapture.