Avoiding a 1031 exchange

[Fletcher Caulk]

I bought a townhome with a VA loan in August 2014 and our renters took over in June 2016. We are considering selling this summer, and I am wondering if we can leave the unit empty for two months so we can take credit for living there for 2 years and avoid capital gains taxes. We would not be living there during these two months. Is this legal?

It would cost us about $6k, but that seems worth it to gain flexibility in not having to go through the 1031 constraints. Our equity is about $200k, so we definitely want to avoid a tax bill.

[Brian Schmelzlen]

To qualify for the Section 121 exclusion, it must have been your principal residence for 2 out of the past 5 years.  However, you are not required to live there for 2 years straight.  It can bookend having renters there, as long as you do truly use it as a principal residence.  Keep in mind that you would still be on the hook for any depreciation recapture.

If you do not qualify for the 2 years, you may be entitled to a partial exclusion depending upon the reason you moved.  I would talk to your CPA about if you would qualify.

Keep in mind though that the tax reform bill Congress is currently considering changes the timing requirements to 5 out of the past 8 years rather than 2 out of the past 5 years, so if that bill becomes law you may not qualify for the exclusion anyways.