Rental Property Investor · Fort Wayne, IN · Member since 2017 · 5 posts · 0 votes
Greetings from Indiana. We are about to list our primary residence for sale (house 1 for the sake of this conversation). We are already in the process of closing on a new primary residence (house 2), and do not need the equity in house 1 to buy house 2. HOWEVER we have been dying to get into the rental property business for a long time. We would love to take the 30k in equity (mostly sweat equity) in House 1 and roll it into a rental. We are new, and I have no idea how this works. How much time would we have after we sell house 1 to roll this into a rental so we avoid capital gains?
Also, we do not want to keep house 1 to use as a rental because it is on 5 acres that take 2 hours to mow. Plus, it is far from the new home, so a challenge from a newbie management prospective.
Qualified Intermediary for 1031 Exchanges · Chicago, IL · Member since 2017 · 164 posts · 119 votes
8y
@Sarah King If you have lived in house #1 for 24 out of 60 months you may qualify for the 121 primary residence exclusion. It allows you to exclude $250k (if single) and $500k (if married) of gain from your income. Therefore you may already be in a situation where the gains aren't taxable. Do you expect to see more than $250k/$500k gain on this property?
What you are trying to do here is a 1031 Exchange where you take the profits from a house sale to buy a property of equal or greater value which will result in no capital gains tax incurred.
They only thing I can suggest is to find local professionals who are experts on this matter. The method is a little convoluted where its not something that you can do yourself. So find local RE agents who know professionals or companies who do this line of work and guide.
Qualified Intermediary for 1031 Exchanges · Chicago, IL · Member since 2017 · 164 posts · 119 votes
8y
@Sarah King If you have lived in house #1 for 24 out of 60 months you may qualify for the 121 primary residence exclusion. It allows you to exclude $250k (if single) and $500k (if married) of gain from your income. Therefore you may already be in a situation where the gains aren't taxable. Do you expect to see more than $250k/$500k gain on this property?
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
8y
If you qualify for the 121 primary exclusion, you’re home free.
If not, you can’t 1031 a primary, do you’ll have to pay cap gains.
BTW, it’s not your Equity that is taxable, it is your Gain.......selling price minus selling/closing costs, minus purchase price plus major improvements.
Rental Property Investor · Fort Wayne, IN · Member since 2017 · 5 posts · 0 votes
8y
Thanks @Wayne Brooks and @Lauren Speidel this was very helpful. We do qualify for 121 primary residence exclusion, after reaching out to an accountant. I really appreciate your insights!