Yeah, I know a lot of questions come up about capital gains. I’ve tried to research it, but don’t have a definite answer to my question.
My situation is this. I’m about to put my primary residence on the market. If it sells fairly quickly, I will be a couple months short of the 2-year requirement for not having to pay capital gains taxes.
I may purchase a new primary residence prior to mine selling, but my old one would be on the market at the time (loan is no problem). I am also looking at investment properties, but don’t want to purchase one until all is settled between the 2 primary residences (the one I’m selling and the one I’m buying) so it doesn’t affect my credit.
My question is, what’s the best way to handle this? Do I need to wait for the 2 years to be up before making EITHER transaction (buying new and selling old)? Can I arrange some sort of 1031 exchange out of this to get an investment property if I end up being short of the 2 years in my old residence, or does the exchange have to be between 2 investment properties? Can I convert my current primary residence to a “rental” after I move into the new place and then do a 1031, even if I never actually get any renters in it?
you should wait until you are close to 2 yrs to list your home. you need to hold title for 2 years; there ware ways to take a partial deduction if you can prove some type of hardship/moving for a job. Probably easier to wait.
you can not claim your home as a rental property until you collect rental income.
Ok, thanks for the info aak5454.
Will I have a problem if I close on the new house before the 2 years are up? Could they then say that I didn’t use the old house as a primary residence, even though I retained ownership, for the full 2 years and deny the capital gains exemption?
If you declare the new home as your primary residence before you have lived in the old one for 2 years, you will have to pay capital gains on the proceeds from the old one.
The 2 year clock begins ticking again as soon as you declare the new home as your primary residence.
If you have a lot of gains, the best thing for you to do is keep your primary residence the old house until the 2 year period is up, then move into the new one. Especially if the taxes equal more than 2 months mortgage payment on both homes.
so what happens if you buy a 5 bedroom house from a preforeclosure, live in 1 room, rent the other 4 out, then 6 months later want to sell and stand to profit 125k, can you 1031 that profit into a rental unit like a 8 plex or something?
What effect does primary residence have on a 1031 exchange?
TheShadow,
That’s a good question, I’ll be interested to hear an answer.
Another related question for anyone, how long does the property have to be a rental before it can be used for a 1031? My property is in a vacation area (in the mountains, riverfront property, 60% of my neighbors are seasonal residents). Can I rent it to vacationers for 1 or 2 weekends and then be eligible for a 1031?
Thanks again to all for your help.
I hate this tax stuff.
for properties, you can effectively split them on paper for tax purposes; however, you will not qualify for an exclusion under sect 121 and its under one year so, the profit will all be taxed as ordinary income/short term gain.
For the most part, the general “rule of thumb” for 1031 exchanges need to be held for an excess of 1 yr. This is not spelled out in the code per se, but is a generally accepted practice. Also, in it must be an “investment” property. In plain english this means if you have a substantial/majority of your income from some other source (day job) then it qualifies as an investment; if your main sources of income is flipping properties then you will be taxed as income since it is considered inventory for your business. There are some strageties to work around this (see other post on this board in Legal section dealing with LLCs, etc).
This is the highlights. If you want more info, read back thru the post as there are numerous excellent discussions about 1031s.
TJGIRL,
If your 2 months shy, wait about 2-3 weeks to list it on the market. I dont know the housing situation in your area, but chances are you wont accept an offer within a couple weeks after its been listed anyways…that being said, say you accept an offer, it usually take 30 days plus to close on the deal anyways…so your looking at that 2 months now…and if you think you will fall short of the 2 years, make it part of the agreement that you wont close until the 2 year period is up…most people will probably understand and it wont affect their decision to buy over a couple weeks. If it does, there will always be more interested parties. Good Luck!!
your question about rental status; renting a couple of weeks a year does not necessary make it a rental and what neighboring properties are doing has no bearin on your tax status. In general, you can use a property up to 14 (or 30 days, I forget which) a year and still classify it for tax purposes as 100% rental property. Beyond that, you will have to effectively split the property for taxes purposes. As such you may be able to do a partial 1031, but the scenario you suggest of a couple of weeks a year rental probably does not make sense…
black95gt,
Thanks for the advice.
I’m actually 3 months short right now, so I was figuring if it went under contract soon, then closed on about one month, I’d still be 2 months short.
I’ll probably list it soon. I talked to my realtor Sunday and she said we could put in a condition that I can’t close until the 2 years are up for me. So it looks like things will work out.
Unfortunately, I have no idea how long my place will sit on the market because my area is hard to compare (there aren’t any “comparible” houses on my street - never mind one that’s sold recently or are up for sale). So it’s pretty much a wild guess as to how long it will stay on the market and all of this may be a non-issue.
Other places in my neighborhood are staying on the market a long time, but, in my opinion, they are WAY overpriced. I plan to be more reasonable. Plus my place is a house, and most of those are vacation cabins.