Looking for a way out

[Tyler Herlihy]

Here's the story. September 2017 I bought a house in the suburbs of the city. At the time it was a great spot. Close to several things I like to do, lots of space, etc. I had a job located 10-15 minutes away in a office also located in the suburbs therefore it was not a bad commute.

I wasn't a big fan of the job I was in so I started searching for a new job. 4 months after buying my house, I found a position that I enjoy much better located less than a 1/4 mile from where I lived before I bought! I could have walked to work! Bummer. I now travel with traffic into the city during rush hour adding 20-25 mins to my commute and a lot of travel back and forth because now I find that most things I do work and personal related are in the area I was in before and I have to juggle home responsibilities and the rest of my life ~25 minutes apart from each other. 

While its not the end of the world if I can't, I'd really like to move back closer to work and friends. I am not sure I can make any money on the house I'm in since it really hasn't increased in value much since I bought and even if  I do, I still have the capital gains tax to worry about as I have only been in the house a little over a year.

I am looking for more creative options to get back to the area I was in before that won't leave me at a large loss. I'm interested in the REI/flipping/rentals as an investment vehicle (hence why I'm on this site) but I'm not sure this is the way to get into it. Does anyone have any suggestions for avenues to get out? Thanks in advance.

[Clayton Mobley]

@Tyler Herlihy I'd just like to point out that while I am HUGE fan of the 1031 exchange, you cannot use that process for a personal residence. The 1031 is only for long-term investment properties (which means not for flips either). 

Now, if your market supports it and you have the financial ability to do so, you could move back to your old area and convert your current residence into a rental. Hang onto it for 12-18 months and then, if you want to sell it, you can use the 1031 because you have converted it into a buy-and-hold investment property. 

The other option is to live there for another year (sorry) and then sell, any gain you earn would be tax-free under the Sec 121 exemption - up to 250k for a single filer or 500k for a married couple filing jointly. Sounds like making any serious money would be unlikely, but this is a way for you to avoid taxation on what gain you do have. 

Now, if you qualify for some exceptions, you could potentially sell now and apply the Sec 121 exclusion partially - ie, you've lived there for 1 year out of the 2 normally requires, so you'd only be eligible for 50% of the exclusion amount. If your new job is more than 50miles away from your old job, for example, you could qualify for this. If you're in the military or intelligence service there are other exceptions.

Here's some reading on this topic if it helps:

https://www.journalofaccountancy.com/issues/2009/n...

https://www.irs.gov/taxtopics/tc701

http://www.exeter1031.com/article_changes_to_secti...

You can also combine the Sec 121 and 1031 exchange if you stay for another year to meet the Sec 121 requirements and then convert the property to rental as I mentioned above. Also, the two years for the Sec 121 exemption do not have to be consecutive, it just has to be 24 months of owning and living in the property within the prior 60 months. 

I won't get into all the permutations of these two strategies, but you get the idea. If you want to just sell now and don't meet any of the requirements for a partial Sec 121 exemption, then you'll just need to pay the taxes/take the hit. But you do have options if you have the time/money to wait a bit.

Good luck!