How can I avoid paying capital gains tax on my live-in flip?

[Jesse Stemle]

Hey Everyone!

I bought an old beat up house just outside of Louisville, KY in August 2019 for $120,000 with the intentions of fixing it up while living there as I am just out of college and was looking for a place to live. Once it's done the house should sell for around $240,000. I want to make sure I am making the right decisions now in order to protect myself from having a decent tax bill. 

My plan with the house originally was to renovate it over the course of two years and than sell it to avoid paying any capital gains tax.  About 6 months ago I realized I would probably have the house done much sooner than I had planned so I met with some realtors to talk about my options with selling it before meeting the two year threshold of ownership.  One of the realtors I met with suggested that I could do a 1031 exchange to avoid paying any capital gains tax on it despite only living in the home for just over a year.  Upon further research, I believe I have discovered thats incorrect and I wouldn't meet the requirements for a 1031 since its technically my "primary residence" and not an "investment property".  

My question is this:

What is the best way for me (if possible) to wrap up this house in the next few months, sell it, and avoid paying capital gains tax?  As stated earlier, I purchased it in August if 2019 and will have it ready to sell by the end of March.  Would waiting until the end of this August (2021) to sell the house be my best option? 

Any input or advice would be greatly appreciated! 

Jesse

[Dave Foster]

@Jesse Stemle, You're right.  That property doesn't qualify for 1031 because it is your primary.  But because you've owned it for more than a year you will pay only capital gains tax on the sale.  Or hold for the extra 5 months.

You could also get a job out of area.  There is an exception to the two year period when you have to move for job related reasons.  That would let you get most or all of that gain out tax free :)

@Jay Mersfelder, if that property is an investment property and not your primary residence it might be eligible for a 1031 exchange.  The 1031 will allow you to sell that property and purchase new investment property without paying tax on the gain.

One positive for you - you've held the property for over a year.

Once negative for you - Your intent has to have been to hold that property.  If you bought it just as a fix n flip and your intent was primarily to resell then it is ineligible for a 1031 exchange.