1031 Mistake - Oops!

[Holly Barrett]

So I made a mistake.

We sold a rental property and I assumed that we had to do 1031 exchange to avoid capital gains tax. My bad. I didn't double check for exceptions.

$850 later, thinking I was so smart for doing 1031, I hear about the 2 out of 5 year rule exception on Bigger Pockets. No! 

See we lived in the home the first 2 of the preceding 5 years. We wouldn't have had to pay capital gains anyway! Grrrr... Lesson learned. I'll never forget it. 

Moral of the story, don't expect your real estate agent or 1031 exchange group to catch exceptions for you. Ultimately it was my responsibility to double check and not make that assumption.

From TheBalance.com: 

"The exclusion depends on the property being your residence, not an investment property. You must have lived in the home for a minimum of two out of the last five years immediately preceding the date of the sale.

The two years don't have to be consecutive and you don't actually have to live there on the date of the sale. You can live in the home for a year, rent it out for three years, then move back in for 12 months. The IRS figures that if you spent this much time under that roof, the home qualifies as your principal residence."