How to do a 1031 exchange

Question

I currently have a property and am thinking about doing a 1031 exchange and have a few questions. I will explain the situation a little bit more. If it is a possibility I would like to maybe take a small amount out from the sale and keep it for other bills.

I would like to find a way to sell the property and avoid the capital gains taxes if possible.  It was my primary residence for over 2 years and I moved out about 2.5 years ago. I cant remember the right name for the sale of primary residence but would this be eligible to sell and not pay taxes since it was primary residence since it still has been primary residence for 2 out of past 5 years? Or is a 1031 the only route where I can sell and avoid extra taxes? I would like to keep most or all of it in real estate. If it changes things I recently am changing jobs and sold my current primary residence in March.

Hopefully that isn’t too confusing if so please feel free to reach out. Any advice is welcome.

Bill Exeter · Answer

Hi @Jay Bickmore,

It sounds like you qualify for both at this point in time.  You can still say that you have lived in the property for 2 out of the last 5 years so you would qualify for the 121 Exclusion of $250,000 per person ($500,000 for married couple).  If you have also rented the property since you moved out, you will also qualify for a 1031 Exchange.  Assuming you qualify for both, you can sell, take the 121 Exclusion of $250,000/$500,000 and then do a 1031 Exchange if your taxable gain exceeds the $250,000/$500,000 121 Exclusion amount.

Glenna Wood · Answer

Did you claim the 121 exclusion on the primary home you said you just sold in March? If yes, you can only claim a 121 once every two years so you could no longer reach back to your former primary home/now rental property and do this again until two years pass from your March primary home sale. By then it looks like the 2 of 5 year rule will be hosed.  Also remember you can only 1031 RE being used as an investment at the time of the exchange and into future investment RE. I'm not a pro just an investor with 1031 experience.

Dave Foster · Answer

Good catch @Glenna Wood!!!

Jay Bickmore · Answer

@Glenna Wood

Yes I did use use 121 on my primary so I might be out of luck there but I do plan on doing the 1031 and using all the proceeds for re so I will explore that option in a little bit more detail. Thanks for the input.

Jay Bickmore · Answer

@Brad Hammond I will reach out the cpa thanks for the input.

Dave Foster · Answer

@Jay Bickmore, One benefit in doing both even if your total gain doesn't exceed the 121 exemption is that depreciation recapture can only be deferred in a 1031 exchange.  Depending on your starting basis that may not be much or it could be significant since depreciation is recaptured at 25%.

Brad Hammond · Answer

Hi @Jay Bickmore, I am actually going through a very similar situation right now.  I talked with my tax advisor and she said that I will still need to pay capital gains tax on the years (she broke it down to days) it was a rental.  I would keep that in mind and double-check it with your local CPA as your mileage may vary.  As far as a 1031, I'm not sure if you can do that or not since it was a primary residence.  It sounds sticky but again, talk to your CPA.

How to do a 1031 exchange

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