This post will explain it better than anyone here can. No offense intended to anyone here, but this is a well written summary that I found by reading here, and I've linked to it before.
Here's a recap:
-The depreciation recapture would become taxable (at a maximum rate of 25%) when you sell the primary residence after living there at least 2 years.
-Any gain on the new residence from the time you move there until the time you sell it (as long as you live there in 2 of the 5 years leading up to the sale) would be excludable from taxable income.
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Any gain on the new residence before the time you move in as your personal residence is fully taxable. This includes the deferred gain from the NJ properties.
Since DW and I will be at a high tax bracket for the next two or three years, I would like this transaction to legally minimize taxes.
So, my questions:- Is this a feasible plan? Do you see any holes in it?
- How much does an 1031 exchange cost?
- Do I need a lawyer for the 1031 exchange or will the exchange company (QI) suffice?
- What taxes will I have to pay at the time of 1031 relating to the sale or is it completely tax free event?
- What taxes are due of the sale of the FL property if it is my primary residence for at least 5 years?
If anyone can point me to any resources, I would appreciate it. Being a software guy, I have googled, but not being an Accountant/CPA I am not sure I understand all of the nuances.
I would appreciate the opinion of wiser folks on this forum.
I won't legally minimize taxes, it will legally defer taxes until a later date when you will likely be in a lower tax bracket. Maybe that's what you meant, not sure. But the thing that stinks is you will end up with a $200K-500K gain at some point which will put you into a high tax bracket anyway. The only potential caveat is if you don't sell the primary residence and leave it behind in your estate at which point it may receive a step up in basis and some (maybe all?) of the gains would be washed out and never taxed. Now you're getting into estate planning though and that's a whole other conversation.
Answers to questions:
1) Yes, it's feasible as a tax deferral vehicle. I don't see any holes.
2) Variable. Potential legal, QI, and CPA costs. The only thing you MUST pay for is the QI, the rest is at your discretion. The QI is simply holding your money, pushing some paper and giving some advice. I don't know what they charge but I would guess not much more than a title company, so maybe $1-2K?? Ask around.
3) Need, no. If you hire a good QI they should be able to handle all the intricacies.
4) Tax free event if done properly. One key which you've covered is you have to upgrade. $150+$100=$250 < $275. If you downsize, you pay taxes on the transaction. Same thing goes for debt
I believe, so I don't think you can bring a ton of cash to the table and leave with less debt than you started with.
5) See my notes above. Any and all gains before the day you move in.
Disclaimer-I've been involved from the CPA side on a few of these. I've done a little research, made a few calculations, and given some advice. This is a niche thing, and I'm not an expert. Anything I said above is to the best of my knowledge, but there might be an error or two. If anyone wants to contradict anything I said, don't hold back because you might be right and I might be wrong.
Unless you are supremely confident, I would hire a CPA (with 1031 experience) for your 2015? tax return (The year of the sale). As you can tell by the disclaimer, I've done this before and I'm still not supremely confident in my knowledge. The deferred gain calculation is not simple or even really all that logical so it can be screwed up. A big enough mistake there could lead to a large penalty and interest due to the IRS if they ever figure out your mistake.
Good luck!
