Section 1031 Tax Question

[Tyler J.]

Hello I have a question. I bought a house for $40k and put about $20k into it. I'm positive I can sell for no less than $79k for about a $19k profit before taxes, fees, commission etc. Well I put a lot more money into the house than I anticipated and now don't have much money in saving, which I don't like. I have not moved into the house, I live with my brother but planned on moving into the house when it was complete. I have owned it for 3 months now but have not moved in.

My question is under section 1031 do I qualify if I purchase another home within 60days and do the same thing, but actually move into this one, or does that qualify as a "like kind" exchange and I will still owe the taxes?

Thanks

[Dave Toelkes]

You do not qualify for a 1031 exchange under the scenario you described. You purchased this property to use as your primary residence. A principal residence does not qualify for 1031 tax treatment.

Even if you convert the property to a rehab-flip, you still don't qualify for 1031 tax treatment. Flips are not eligible for 1031.

However, you do qualify for an even better tax treatment than a 1031. Stick with your original plan. Move into the house and occupy as your primary residence for two years. Then when you sell two years later, ALL of the sale profit (up to $250K) will be tax free.

Remember, a 1031 only delays the taxes you will eventually have to pay. Sale of a primary residence can permanently exclude the sale profit from taxes.

FYI, this area of tax law is so specialized, future 1031 questions are probably better suited for the 1031 forum.