Whether to sell, re-rent, or do Airbnb with a rental house

[Lisa Maturo]

I own a rental 3br 2ba rental income home in Tempe AZ and I'm

considering scenarios after my renter just gave 30 days notice.

Can I do a 1031 exchange on a rental? Also, do I have to live there for two years

in order to avoid capital gains? Considering a move back into it to fix

it up and then sell for more $$ in couple years.

It's been a while  since I've looked into these scenarios (I own 3 properties that I just

buy and hold/rent out) as I'm not that active of an RE investor. Trying

to avoid capital gains and do what makes most financial sense. I could

re-rent it of course, also thought about doing Airbnb for Spring

Training and snowbird season. So many options my head is spinning.

Anyone know of a good RE Tax accountant, RE agent or RE attorney I could talk to

for running these different numbers and scenarios?  I don't want to be talked into

selling by an eager RE agent looking for commission, so I'm hesitant to look for advice from agents

I am worried they might be biased toward selling. Thanks for the help!!!

[Dave Foster]

@Lisa Maturo,

1. Its perfectly fine to do a 1031 exchange and sell an investment property and purchase any other kind of investment property.  So you could sell this one and buy a different sfr or an air bnb, or a commercial property - whatever.

2. Living in it is only required if you want the tax free primary residence exclusion.  That has nothing to do with 1031.  For that you do have to have lived in the property for two out of the 5 years immediately prior to the sale.

3. If you move back into it you are converting a rental into your primary and you'll need to live in it for two full years out of the 5 year period prior to sale.  And when you sell you'll only get to prorate the gain between the period that it was used as a rental (non-qualified use) and the period that it was used as your primary residence (qualified use).  And you'll have to recapture depreciation.

[Daniel Chun]

@Dave Foster Can you expand on this part?

[Dave Foster]

Sure thing @Daniel Chun.  There's really three different possible scenarios for a property that you want to get the primary residence exemption for..

1. You buy it as your primary first and then sell it - as long as you can document that you have lived in it for two out of the 5 years immediately prior to sale you can take the entire exclusion tax free.  This includes if you move out and use it as a rental for a couple of years after moving out.  But you will have to recapture the small amount of depreciation.  The key is that it was your primary first.

2. You buy an investment property and then convert it into your primary residence.  This is the scenario discussed above.  Because it was an investment property first you must prorate the gain between the rental use and the use when it was your primary.  So you will only get a % of the gain tax free.  And you have to recapture depreciation.  This was first an investment property and you converted it into your primary.

3. You buy an investment property and then do a 1031 into another investment property.  And then you convert it into your primary.  This has all of the same rules as #2 and you also cannot sell and get even the prorated gain tax free until you have actually also owned the property for at least 5 years in total.

[Basit Siddiqi]

@Lisa Maturo

I think your first course of action is to determine what the tax would be on the sale of the property.

Considering you used it as a rental property and took depreciation, calculating the gain/tax is more than just taking the fair market value less what you spent on the property.

Factor in federal and state taxes into this calculation.

You then want to see if there is a tax due and if there are ways to defer it. 
Section 121 exclusion would only apply if you lived in the house for atleast 2 out of the last 5 years.