1031 Exchange of primary residence - can it be done?

[Prithvi Sri]

I bought a home in bay area fifteen years ago for 750K. Lived there for many years and left to LA about 18 months ago and rented to someone as soon as I moved. I sold the property a couple of weeks ago for 1.65M and I am in the middle of escrow. The house is fully paid and there is no mortgage. I assumed that I am eligible for 500k capital gains exclusion which leaves me with approx 350K in capital gains. But I read an article somewhere that a primary residence converted to a rental property can benefit from both 500k capital gains exclusion as well as 1031 exchange. I don't need the money right away so if I can do a 1031 exchange to save the taxes on the 350K, I would like to consider doing it. Can someone who has done 1031 exchanges tell me if it is possible and if it is worth going through the pain. Thank you for your help.

[Bill B.]

You can do a 1031. 
Your mortgage or lack of mortgage doesn’t matter. 
you’d have to get a 1031 QI like @Dave Foster involved now, as soon as you touch the money it’s too late. 
You’d have to be ready to identify a replacement property within 45 days and buy it within 180 days. 

Ps. I believe California is going to chase you for that tax if you ever sell even if you have moved out of the state. 

[Bill Exeter]

Hi @Prithvi Sri, 

Yes, you certainly qualify for a 1031 Exchange.  You moved out of your primary residence and have rented it long enough to prove intent to hold as rental property. 

You would qualify for the $500,000 121 Exclusion since you can still say that you have lived in the property for a total of 24 months out of the last 60 months (2 out of the last 5 years).  

You would only have to reinvest $1.15 million since you will use the 121 Exclusion. 

[Arlen Chou]

@Prithvi Sri I am in exactly your position right now. I sold a primary, in the Bay Area, that was converted to a rental and planned for a 1031. Additionally I am using @Bill Exeter and his team for the exchange. I met Bill at @J. Martin real estate summits a few years ago. Bill was very knowledgeable and his team has been very responsive. 

I wish you the best of luck!

[Scott Wolf]

@Prithvi Sri, if you're still in escrow, you have a chance to 1031.  If you've already touched the funds, it's too late.

[Prithvi Sri]

@Bill Brand, thanks for the response. About that CA tax: When my heirs get the property - how ever longer it is after, the cost basis will be stepped up - that is invalidating CA's tax claim - right?

Originally posted by @Bill B.:

You can do a 1031. 
Your mortgage or lack of mortgage doesn’t matter. 
you’d have to get a 1031 QI like @Dave Foster involved now, as soon as you touch the money it’s too late. 
You’d have to be ready to identify a replacement property within 45 days and buy it within 180 days. 

Ps. I believe California is going to chase you for that tax if you ever sell even if you have moved out of the state. 

[Bill Exeter]

Hi @Prithvi Sri, 

Yes, as long as you do not sell, cash out and pay the tax California will never get paid.  You can keep 1031 Exchanging until you pass and then your heirs will receive a step-up in cost basis so that California does not get paid.  The only time they will get paid is if you actually sell and cash out. 

[Bill B.]

@Prithvi Sri

California won’t get their money if the federal government doesn’t get their money. (If you don’t sell.) My issue/point about California was that they would chase you across state lines. 

I.E. if you did a 1031 out of Minnesota which has a state income tax to Nevada which doesn’t. Then 10 years later sold that property. You would owe federal taxes, but MN wouldn’t come after you, California would.  

[Prithvi Sri]

Bill,

I called your office yesterday and got in touch with Lauren. She is quite knowledgeable and explained me the whole process in detail. I will be completing the paperwork over the holidays and get in touch with her. Thanks for your accurate and detailed explanation, I was able to make an informed choice. Greatly appreciated.


Originally posted by @Bill Exeter:

Hi @Prithvi Sri, 

Yes, you certainly qualify for a 1031 Exchange.  You moved out of your primary residence and have rented it long enough to prove intent to hold as rental property. 

You would qualify for the $500,000 121 Exclusion since you can still say that you have lived in the property for a total of 24 months out of the last 60 months (2 out of the last 5 years).  

You would only have to reinvest $1.15 million since you will use the 121 Exclusion. 

[Bill Exeter]

Hi @Prithvi Sri, 

Great!  You are most welcome.

[Prithvi Sri]

Originally posted by @Bill Exeter:

Hi @Prithvi Sri, 

Great!  You are most welcome.

 Bill,

We closed the escrow on the replacement property today. Tamara , Kristin Allen and Lauren Spiedel from your team helped me through the transaction and I must say, they made it really simple and easy. If you have any future prospects want a reference, you can always ping me. I would like to especially call out Lauren's help at the beginning of the process (prior to selling the relinquishing property) and she had done a fabulous job of understanding the complexity in my transaction and helping me guide properly. Three cheers to your team.