All Forum Posts by: Layla Savant

 Bill, unless I'm reading this incorrectly, doesn't it advise on your firm's website that 12 months is sufficient? 

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Primary Residence Converted to Rental Property

The final scenario consists of you (and your spouse, if applicable) owning, living in and using a property as your primary residence. The challenge is that your capital gain significantly exceeds the $250,000.00 (or $500,000.00) tax-free exclusion permitted under the 121 exclusion, and if you sell your property the amount of capital gain that exceeds the 121 exclusion limitation would be painfully taxable.

The Internal Revenue Service issued Revenue Procedure 2005-14, which allows you to move out of your primary residence and convert it into investment property. The question is how long must you hold the property as investment property? Exeter recommends holding the property as investment property with absolutely no personal use for at least 12 months or longer in order to demonstrate that you did in fact have the intent to hold the property as investment property. Once you have held the property for a sufficient period of time, you can sell the property and qualify for the 121 tax-free exclusion and for a 1031 exchange so that you can defer the balance of the capital gain into more investment properties.

You would sell the property, exclude the $250,000.00 or $500,000.00 in capital gains from your taxable income and complete a 1031 exchange for the balance of the sale transaction to defer the rest of your capital gain, including any depreciation recapture, into the purchase of another like-kind rental property.

It is a great income tax planning strategy when you have a highly appreciated primary residence." 

@Bill Exeter    and @Dave Foster Thanks for the information.  And Bill, those tips about combining the homeowners and the 1031 are invaluable and probably the route I will take.   

Interestingly, my tax accountant said that any number of months on a single tax return would be fine.  So, if I rented from Sept to Dec and sold in Jan, that would be fine as I would show on my '15 taxes a few months' rental income. 

This is wildly different from what I've heard before - which has always been two years.  I'd love to bail out on this property as soon as possible, but don't want to trigger any unnecessary taxes, of course.  I tried calling the IRS and they don't seem to have any live reps anymore! ;) 

And the plan is to have real estate investment become a large port of the portfolio; hence the interest in a 1031 exchange and probably add'l 1031 down the road. 

Yes, the purchase was made several decades ago.

@Vincent Polisi

Thanks.  In this case the gains far exceeds the exclusion, and there is no mortgage.  I'm asking only from the perspective of the IRS allowing the 1031.  Is there are a rule of thumb? My accountant said just one tax return is good enough, even if it's just for a three or four months. 

Some other perspectives would be greatly appreciated!

Hello everyone! 

From what I've gathered, when converting a property acquired via a 1031 to a primary residence, one needs to be very careful to not trigger tax consequences by rkeeping the newly acquired property for at least 2-3 years as a rental. 

However, I'm not seeing much information about the reverse scenario - when a homeowner wants to convert his/her property to a rental with the intention of doing a 1031 exchange ASAP (say, to increase ROI by converting a SFH to a multi), what's the length of time the property needs to be rented for it to be considered an investment? 6 months? 1 year?

Thanks!

From what I understand about deductions these should be done after the property is officially "for rent," right?  What exactly does this mean? Can I put up a "for rent" ad while I'm still living here and will that count?  Can the deductions be taken only against the first year's calendar income?  In other words, if I start renting only in December will it only be able to be taken against one month's income?  

I'm currently living in the property and it needs new flooring and some other minor repairs - new interior paint, a few broken fixtures, etc.  Can I do these repairs while still living here or is it best to first move out and then do them? 

Also, I'm not sure whether it's best to let a property manager handle the repairs (do they do that?) I will likely hire a property manager, at least initially, because I won't be local and available to respond to tenants' problems. 

I plan to sell (do a 1031) on this property in 2 years; how do I research the best flooring for this type of situation?  I hate to put carpet in simply because I hate it myself and also because I feel that after 2 yrs it will show some wear; I know tenants are never as careful as owners with properties. 

How does one go about determining the best repairs to make that will be profitable when selling the property in short time frame (2 yrs)?  I don't want to pour money into the property that I won't recover come sale time.  

Also, how far ahead of time should I start looking for new property (or properties) ahead of the sell / 1031 exchange? I definitely want to exchange this property ASAP (so, right at two years) because I think I could get a much higher ROI in a different location and with a multi-unit (this is a SFH). Should I start looking about 6 months' ahead of time?

Thanks much for your help and guidance!