1031 exchange & capital gains tax for primary property sale

[Jimmy Hong]

Hello everyone,

We, my wife & I, have a primary property that we have lived in for 18 months. We will be selling our home and our net profit will be tax free due to our primary property.

We also just sold our 1st rehab property and we will be 1031 exchanging it.

We are interested in another property to fix & flip but it is a bank owned property and showing to primary homeowners first and then after a week it will be open to investors. This property will receive multiple offers and will not last to investors. We are planning to use our 1031 exchange funds to purchase this property as primary.

How long do we have to live there to confirm its our primary property? We do not want to make this a primary but we are willing to move there to ensure we are able to acquire it, then we plan to sell it as soon as the law allows us.

Thanks in advance.

[Bill Exeter]

Originally posted by Jimmy Hong:

Hi Bill Exeter, my CPA stated this:

According to our research you will have lived approximately 20 months in your present residence by the time of sale. This will be 20 months out of 24 months or 83.3333% of the time. The $500,000 exemption is multiplied by 83.3333% which equals $416,666 that will be the exclusion on the gain on sale of the residence. Therefore, since your total gain is less than $416,666, the entire gain is excluded for income tax purposes if you sell it this year.

This is based on the tax code of 2012 which is supposed to apply to 2013.

Bill, do you disagree with this? Thanks again.

No, I don't agree with that. There are some provisions for "prorating" the exclusion amount such as death, forced relocation due to job, military service, etc., but not just selling property. Have your CPA review again, or get a second opinion.