Best Options for Upgrading to a New SFH?

[Bob Asad]

If I live in a $600k SFH and have around 50% equity but want to "upgrade" to a $900k SFH, what would be the best option?

I was told by the bank that I couldn't do a 1031 because it's a primary residence, and 1031 are only for investments.

But I also don't want to sell and lose 20-30% on taxes (lived in the house for 2 years)

What's the best route?

Put 5% on the $900k SFH and rent out the $600k?

[Jeremy Ellis]

You definitely want to check with your CPA, but in my state, if you lived in the home as a primary residence for 2 out of the last 5 years, you will not have to pay capital gains tax and can roll that equity into your next property. I believe the exclusion limit is $250,000 for single individuals and $500,000 for married couples.

[Dave Foster]

@Bob Asad since you've lived in it for the two years you could potentially qualify for the 121 exclusion, giving you $250,000 of the gain tax free ($500K if married) like @Jeremy Ellis said. Another option if your profit is over that amount is to convert the property to a rental which would then qualify the property for investment use, Then do a 1031 exchange after a year.  But since you still have lived in the property for 2 out of the previous 5 years you could take  the $250,000 as well as defer the rest of  the tax in the 1031.

[Bob Asad]

Quote from @Jeremy Ellis:

You definitely want to check with your CPA, but in my state, if you lived in the home as a primary residence for 2 out of the last 5 years, you will not have to pay capital gains tax and can roll that equity into your next property. I believe the exclusion limit is $250,000 for single individuals and $500,000 for married couples.

 Thanks you were right! Checked with a CPA, it was odd because the loan officers / mortgage lenders didn't know I could do this until a CPA verified, then all of a sudden, they said oh yes you can do it..

[Bob Asad]

Quote from @Dave Foster:

@Bob Asad since you've lived in it for the two years you could potentially qualify for the 121 exclusion, giving you $250,000 of the gain tax free ($500K if married) like @Jeremy Ellis said. Another option if your profit is over that amount is to convert the property to a rental which would then qualify the property for investment use, Then do a 1031 exchange after a year.  But since you still have lived in the property for 2 out of the previous 5 years you could take  the $250,000 as well as defer the rest of  the tax in the 1031.

Thanks for the tip! Regarding the 1031, so let's say I put 5% on the new primary residence ($900k, so $45k-ish), and rented the original (former primary residence), I would have to wait 12 months before I could do a 1031? And if so, the 1031 would have to be for a "third" (or more) property equal to or more of the value of the selling price, correct?

[Dave Foster]

@Bob Asad, that is sort of right.  There's some flexible area in that scenario

1. Using the current primary for a year is a conservative good idea.  However there is not statutory holding period.  It is all about how you can demonstrate your intent to hold that property for investment use.  There might be situations where a hold period of less than (or more than) a year would be warranted.

2. If you want to defer all tax on the 1031 you must purchase at least as much as your net sale.  It doesn't have to be one property.  It could be multiple properties whose aggregate value is greater than your net sale.  And you can always buy less than you sell - you just pay tax on the difference.