1031 Exchange Questions

[Shirley Gregory]

Hello - I own a sfh that I rent out and my tenant recently expressed some interest in buying this home and I am interested in selling it, so it's a win-win.  I have about 100k in equity in it and would like to know if I could use that money to purchase a primary residence to move into and then rent out my current home or do I have to re-invest specifically in rental property with the proceeds from the sale in order to not be taxed on that money?  The reason I want to rent out my current home is because my mortgage is only $700/mo and the other townhouses in my association that are rented are getting $1250 a mo and they have not been updated like mine has been and $550 a mo for one door is too good to pass up.  

Another question I have is, if I do not re-invest the equity how much of it is taxable on the 100k if I put down 65k when I originally purchased the sfh?  All of it or only 35k due to the downpayment?  

Thanks for any input.

Shirley

[Dave Foster]

@Shirley Gregory, There's two parts here.  The first is that you can't do a 1031 and buy your primary residence like @Jorge Perez says.  But you could do a 1031 and buy an investment property that you later decide to move into like @Kyle Kadish says.  It's all about your intent when you purchase the new property and how you demonstrate that.  So with a little patience you can execute that part of your plan.

The second part deals with reinvestment.  In order to defer all tax you must purchase at least as much as your net sale and use all of the proceeds from the sale in your replacement purchase. You can purchase less than your net sale and you can take cash out of the proceeds.  But the difference will be treated first as profit by the IRs.  

The $65K you put down will never be taxable.  But when you do a 1031 and take cash out the IRS says that you are not taking out the $65K. You are first taking profit.

So just figure that everything you take out will be taxable until you take out an amount equal to all your gain.