Confused about 1031

[Jonathan Thomas]

Ok I’ve got a confusing question about a 1031. I have two houses one in California worth about $850k I owe $340k on it. Another house in Nebraska worth about $130k paid off.  We lived in the California house until last June when we moved to Nebraska to take care of my in-laws. My daughter who is pregnant is moving to Georgia. We are thinking about buying a house in Georgia to be near them. Do we need to be concern about a 1031? If we sell the California house what are the tax implications?  Would we have to buy a house of equal or greater value to the California one? What if we sold both houses how would the affect the process?

I’m confused

[Dave Foster]

@Jonathan Thomas, If you've lived in California property for two out of the previous five years before selling, you could take advantage of the 121 exclusion, which allows you to take the first $250k ($500k if married) of the gain tax-free. That would probably eliminate any tax on the CA sale.

Now, if the property had also been used for investment use, you could also qualify for a 1031 exchange, which would allow you to defer all of the state and federal taxes, along with the depreciation recapture, to reinvest into more investment real estate. But I doubt if you would need to worry about this. I'm guessing the primary residence exemption will cover almost all of the tax.

This would let you use that money at will to purchase a house in GA. The NE house will either need to be converted to an investment property, and then later you would 1031 it. You can only do one primary residence exemption every two years.

You are correct! To defer all of the tax, you must purchase at least as much or greater than the net sale of the relinquished property. If you purchase for less than the net sale of your property, the IRS sees it as taking a profit, and you would have to pay tax on any of the leftover proceeds that you receive.

But again, in this case I don't think you'll need a 1031. You'll have to pay tax on the sale of NE because you haven't lived there long enough. And it's not an investment property. The CA house should be almost tax free except for a little depreciaion recapture.