To Sell or to Hold :)

[Taylor Combs]

Currently house-hacking a tri-plex in downtown Pensacola, FL.  I love the place, and want to keep it as a rental when I move. My major concern with not selling is missing out on the Home Sale Tax Exclusion - which would negate any taxes on capital gains up to $250,000 - as long as it's owner occupied 2 out of the last 5 years - which it has.

Any advice on how I can capitalize on tax savings now and keep it as a rental?  I understand a 1031 exchange a little, and my concern there is my tax basis would revert to what I originally paid for the home 6 years ago. 

[Dave Foster]

@Taylor Combs, You can move out and convert your primary residence portion to a rental and rent the entire thing for another 3 years before you lose your 121 exemption on that part.  

And your basis on the rental side is already set.  It will not adjust.  But you are correct, if you rent past your 121 rental your basis will reset to the lessor of your purchase price or the value when you converted it.  But that's what the 1031 exchange is for.  It allows you to sell investment property and buy investment property and indefinitely defer all tax and depreciation recapture.

So you've got some time if you want before you have to act.  If you choose to sell while you still qualify for the 121 exemption you can take that allocation tax free and do a 1031 exchange on the rest of the sale.  So you'll get some gain tax free and defer the tax on the rest.