To 1031 Exchange or Not to 1031 Exchange Tax Question

[James Park]

I wanted open this questions to @Brandon Hall or other BP investors who have experience with 1031 exchange.

Suppose that i have a property in Chicago that i purchased for $400,000. Over the years, I have taken a depreciation to offset my income on schedule E of $25,000.  I sell this home for the same price I purchased it, I would then have a basis of $375,000. I would guess that I would then have a tax liability of $3750 (25,000 * .15 capital gains tax). Let's say that after my closing costs, fees, and mortgage I net $100,000 from the sale of my Chicago. 

Here are my questions:

1) If I reside in GA, will I have any tax implications with the state of IL?   

2) If i identify a investment property in GA and I use the entire $100,000 proceeds from my Chicago property and additional funds to buy the property with cash, would this be a transaction I can defer my taxes.

3) With a small capital gains tax of $3750, would a 1031 exchange be advisable?

One important information I would like to add is that this was a primary residence that turned in a rent in the summer of 2011.

Thanks.

James

[Bill Exeter]

Originally posted by @James Park:

Steve,

I understand that if the home was used prior as your primary residence in the last 5 years you are tax exempt on any capital gains up to $500,000 if filed jointly. The part I am unsure of is if you would get the primary residence tax exemption if you have taken depreciation on the home during the time you held it as a rental. Will you will be tax exempt from your sale price - cost basis?

Steve and Brandon are right on the money.  Taxpayers have a three (3) year window as soon as they move out of their primary residence and convert it to rental or investment property in order to take advantage of the 121 Exclusion ($250K/$500K tax-free exclusion under Section 121 of the Internal Revenue Code).  They must decide to sell and close on the sale of their former primary residence no later than the last day of the three (3) year window if they want to take advantage of the exclusion.

Depreciation recapture can not be excluded under Section 121, so any depreciation taken would still be recaptured.  Properties that are not sold during the three (3) year window become solely investment properties and no longer qualify for the tax-free exclusion.