i was reading up on some sites where it said a 1031 exchange defers tax for some time…and is not tax free.
what if i were to do a 1031 exchange, and then live in that home for 2 years…wouldn’t that fall under the category of being excempt from capital gains tax for ($250k single person, $500k married) or not?
i have yet to find some clear information which really reaps the benefits of 1031’s.
any info welcome
ryan
For your personal residence, if you live there for 2 years you don’t need to do anything. Any gain on the sale of your residence is basically tax free.
For true investment property, the 1031 postpones any gain until the property purchased in the exchange is later sold. or the next, or the next…you get the idea. I don’t think there is any limit to how many times you can repeat it, but in the end ALL the gain will be taxed when the final sale takes place.
ive read that you can exchange some rentals, then convert a rental to your residence, and avoid the taxes if you live there 2 years. it was in a newsletter from a local realtor. ive never done an exchange though
Mark, when doing 1031 exchange, do i have to exchange for the property of higher value or it can be lower? here’s the example 450K FMV - Purchase price 390, if i sell the property for 450 can i put 60k in gains as a downpayment for a property that worth only 250K?
Ryan
it has to be equal or higher value and same type of property. if you do an exchange at a lower price you will be taxed on the remaining of the capital gain. for example : I purchase SFH for 250k and sold it for 350k, I exchanged for another for 325k i will be taxed -depending on how long i kept it- on 25k capital gain. my .002
I stand corrected
mcwagner, yes i’m aware for your personal residence that you do not pay gains if you live there for 2 years.
that’s kind of what i’m confused about. if i do a 1031 exchange to defer the taxes, then I decide to make that my primary residence for the 2 years. am i excempt from the tax that was deferred or no? if not, im trying to see the big benefit of doing a 1031 versus jsut living in the place to avoid gains. (or at least in my current situation)
ryan
No way it would be this easy to avoid gains.
So you want to do a 1031 to get new investment property and defer gain, then move into the new property as your residence?
I haven’t researched this, so this is “off the cuff”.
Anyway, any gain while it’s an investment is not excludable.
At the very least, any depreciation you took (or could have taken) while the property was an investment would not be excludable (would be taxable gain) when the residence is later sold.
I’m pretty sure that any gain that was deferred in the 1031 would still be taxable, since it was gain BEFORE it was your residence. The real question is when does it become taxable?
The conversion of the investment property to a personal residence may trigger a taxable event when you move in. I’m not sure if this type of conversion would be treated effectively as a sale on the conversion date, or if the gain would wait until the residence is later sold.
Correct — any depreciation prior to conversion to your personal residence is subject to taxation. Bear in mind that when you convert it to your personal residence you are converting it’s ‘on the books’ value.
To the poster that said the property that is acquired and using the 1031 exchange has to be of equal or higher value---- that’s incorrect. It has to be of equal or higher level of debt. (This just makes commone sense as well). Lets use an example. Lets say you buy a house for $100k and sell it for $200k. The 100k profit (we’ll assume it’s net for the sake of discussion) would mean that you have to buy a house for >100k or pay taxes on the difference. This is just common sense. But lets say you buy a house for $200k and sell it for $300k. You could turn around and invest that $100k into a house for $150k because it results in no transfer to you of other (not-like-kind) exchange of property or money. The IRS specifically states that properties are like kind even if they differ in grade or quality (i.e. value does not determine whether it’s like kind).
1031 exchange is a simple concept on the surface, but can get very complex; particular when involving “boot” (cash or personal property involved int he exchange) or “mortgage relief”. “mortgage relief” is when you end up with a small mortgage/debt on the replacment property (ies). So one needs to use some caution when exchnages involve smaller total debt and/or other non-real property.
Most 1031 books will have the worksheet you need to calculate whether you have a taxable gain when involving boot or mortgage relief.
As for conversion, you can convert a 1031 replacement property into a primary residence and then later take a 121 exclusion. Effective with Revenue Prodecure 2005-14 (as a result of a law signed in 10/04), you need to have owned the property for a total of 5 years in order to do a 121 exclusion (in addition to have placed the property into service as a rental/investment property at the time of replacement as well as the normal 2 yrs. out of the last 5 for a normal 121 exclusion).
as for conversion, to my knowledge, no taxes are due until the final disposition (sale) as that is when you realize the gain.
so, in this scenario, how is the gain prior to conversion into the residence handled? Is it excluded with 121 or does the 121 only exclude gain after conversion and prior gain is recognized?
I can’t imagine them letting you exclude that gain. things that sound too good to be true…usually are.
and thanks. good info to have.
according to what I have been able to find, the depreciation is recaptured, but the ENTIRE gain is excluded; pretty amazing, eh?
the best resource I have foudn on this is the articles on this website
that’s just hard to believe. I hope “they” don’t find out about it…
There is some misstated facts in the IRC 1031 Tax Deferred process, I recommend all involved in the process get written information on it; then compare those facts to several reputable sources. TIMCOR has a FREE explanatory brochure you can request to be mailed to you. Then take time read the brochure then consult your CPA. If you have further questions you can call and speak to someone FREE. There are lots of great companies that handles this process.