More than 500K in equity in primary residence?

Question

What can you do if you have more than $500K in equity when selling your primary residence? Can you "1031" the balance or any other restructure to not pay tax on the gains?

Dave Foster · Answer

@Dori Arazi, You actually can combine a 1031 with a sec 121 primary residence sale.  However you have to be patient enough to move out of the house for a year or so and convert it into an investment property.

Then when you sell you do a 1031 exchange but take $500K in boot.  That boot would normally be taxable but since you've lived in the house for 2 of the 5 years prior to sale that $500K becomes tax free and the rest is tax deferred in the 1031 exchange.

Jay Hinrichs · Answer

WOW I did not know that.. that's my plan now then.... what a great way for those who own in high value markets to exit their Primaries. For me I have already bought my replacement home to live in.. And don't need the money from this house to move.. so that's a great strategy.. plus the rent on these high end homes has gone through the roof 5 to 7k a month  LOL..

Paul Allen · Answer

Sale price - (Purchase price + Cost of improvements + Cost of sale + Cost of purchase) = Capital Gain

If it was a business property you would also subtract the depreciation allowed or allowable. (Form 4797 Part III, Line 22)

There are sometimes other adjustments to CG, but that should cover most of it.

The $500K section 121 exclusion on CG is for married couples filing jointly. Both must have lived in the property for 2 of the last 5.Only 1 needs to be on the title. A single person gets a $250K section 121 exclusion.

Best of Luck with Your Real Estate Investments!

Dori Arazi · Answer

Thanks @Paul Allen! That helps clarify things. I should be under the $500K at that point

@Mark Hughes, As it stands with the current mortgage the house -barely- breaks even. It was a terrible cash flow play though did well in equity. If I refi or HELOC the payments will push things over the edge, it would be unlikely that I can find a property to buy with that pulled money that will balance out the payments.

@Grant Rothenburger, coming on 2 years this October.

Grant Rothenburger · Answer

@Dori Arazi How long have you lived there?

Dori Arazi · Answer

So to clarify

It’s final sale price minus initial purchase price minus improvement price that needs to be under 500?

Dave Foster · Answer

@Dori Arazi, yah they rarely do in these types of situations. The comparison point is the potential loss from rental vs tax you'd have to pay if you don't rent for a loss.

Dori Arazi · Answer

@Dave Foster, that makes sense. Thanks Dave. Sadly I don’t think this property can rent for running costs. I’ll do the Matt and see where I have more potential loss.

More than 500K in equity in primary residence?

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