Question on doing 1031

[Rao V.]

Hi,

I acquired a rental on cash for $100k few years ago and it has tenants.

The property is worth 200k. so my gain is 100k.

What is best option I have to defer any tax gain.

1- Buy another project for flip using 1031 and sell that flip for a profit.

2- Buy another house as primary resident, flix it and then flip it after 2 years.

Which one will put more money in my pocket?

[Dave Foster]

@Rao V.  Sorry to bear the bad news but neither of those are possible as stated.

1. If you 1031 you must be purchasing a property which you intend to "hold for productive use in business trade or investment.  If your intent is to immediately sell (flip) then it would not qualify for 1031 treatment and if questioned you would owe the entire tax plus.

2. You cannot 1031 into your next primary residence for the exact same reasons.  Your intent when you purchase must be to hold it for investment.

But....

1. You could pay the tax on your 100K  gain (maybe 25 - 30K) and then use the cash for anything you want.

2. You could 1031 into another very nice property and after using it for investment for a year or two convert it into your primary residence.  That would shelter the 30K immediately and after several years turn a portion of it into tax free.

3. You could simply keep the property you have and do a refi.  let the tenants pay the mortgage and you enjoy the cash in your pocket.

There's no quick way to turn that into cash without paying that huge tax.  Amortize that out over a mortgage and you'll probably look into the refi angle.