Author Topic: 1031 exchange and later switch to primary home?  (Read 718 times)

TheBeeKeeper

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1031 exchange and later switch to primary home?
« on: February 13, 2019, 11:25:31 AM »
I have a rental property that has increased a lot in value + about 40K in depreciation. Bought it for about 200K$, can sell for at least 300K$.
Planning on selling it in a year or 2.
We are also planning on moving to another location in town 3-4 years from now, so I was thinking to do a 1031 exchange and buy a place where we would want to live later on, have it as a rental property for about 2 years, and then move in.

Would this strategy work for avoiding a huge tax payment on the gain from the rental sale?


waltworks

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Re: 1031 exchange and later switch to primary home?
« Reply #1 on: February 13, 2019, 11:44:08 AM »
You will at least owe back the depreciation when you remove the property from service and move in. The capital gains I'm unsure on, but your gains aren't *that* huge anyway. The depreciation is the big chunk, and that you'll have to pay back.

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SeattleCPA

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Re: 1031 exchange and later switch to primary home?
« Reply #2 on: February 14, 2019, 08:04:14 AM »
I have a rental property that has increased a lot in value + about 40K in depreciation. Bought it for about 200K$, can sell for at least 300K$.
Planning on selling it in a year or 2.
We are also planning on moving to another location in town 3-4 years from now, so I was thinking to do a 1031 exchange and buy a place where we would want to live later on, have it as a rental property for about 2 years, and then move in.

Would this strategy work for avoiding a huge tax payment on the gain from the rental sale?

Lots of people think what you describe works. As Waltworks notes, however, when you someday in the future sell that new primary residence, you'll have depreciation to recapture, gain to report, etc. (You can't in other words use Sec 121 to shelter income or gain or depreciation previously ignored because of a Section 1031 exchange.)

Another Reader

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Re: 1031 exchange and later switch to primary home?
« Reply #3 on: February 19, 2019, 06:37:34 AM »
You will at least owe back the depreciation when you remove the property from service and move in. The capital gains I'm unsure on, but your gains aren't *that* huge anyway. The depreciation is the big chunk, and that you'll have to pay back.

-W

Pretty sure you don't have to recapture depreciation when you move in.  Only when you sell.

waltworks

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Re: 1031 exchange and later switch to primary home?
« Reply #4 on: February 19, 2019, 10:12:52 AM »
I am not a CPA, but my impression from having done my own taxes for years is that when you remove a rental asset from service (meaning you stop renting it out) you owe the depreciation back, regardless of whether you sold the asset or not.

I could be wrong about that, though. You should ask a real accountant.

-W

Another Reader

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Re: 1031 exchange and later switch to primary home?
« Reply #5 on: February 19, 2019, 10:28:13 AM »
I am not a CPA, but my impression from having done my own taxes for years is that when you remove a rental asset from service (meaning you stop renting it out) you owe the depreciation back, regardless of whether you sold the asset or not.

I could be wrong about that, though. You should ask a real accountant.

-W

I believe SeattleCPA is of the same opinion, see above post.

CowboyAndIndian

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Re: 1031 exchange and later switch to primary home?
« Reply #6 on: February 19, 2019, 01:16:03 PM »
See Kitches article about this.

Read the section titled "Converting A Rental Property Into A Primary Residence", which would be your case as the rental bought with the 1031 exchange is now converted to your primary residence.

https://www.kitces.com/blog/limits-to-converting-rental-property-into-a-primary-residence-to-plan-for-irc-section-121-capital-gains-exclusion/


I had similar questions as I wanted to do something similar. @Cheddar Stacker gave some great advice and pointers. Please read that thread https://forum.mrmoneymustache.com/real-estate-and-landlording/questionsadvice-about-rentals-gt-1031-exchange-gt-rental-gt-primary-residence/



SeattleCPA

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Re: 1031 exchange and later switch to primary home?
« Reply #7 on: February 19, 2019, 01:31:09 PM »
You will at least owe back the depreciation when you remove the property from service and move in. The capital gains I'm unsure on, but your gains aren't *that* huge anyway. The depreciation is the big chunk, and that you'll have to pay back.

-W

Pretty sure you don't have to recapture depreciation when you move in.  Only when you sell.

+1

Cheddar Stacker

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Re: 1031 exchange and later switch to primary home?
« Reply #8 on: February 19, 2019, 09:47:21 PM »
See Kitches article about this.

Read the section titled "Converting A Rental Property Into A Primary Residence", which would be your case as the rental bought with the 1031 exchange is now converted to your primary residence.

https://www.kitces.com/blog/limits-to-converting-rental-property-into-a-primary-residence-to-plan-for-irc-section-121-capital-gains-exclusion/


I had similar questions as I wanted to do something similar. @Cheddar Stacker gave some great advice and pointers. Please read that thread https://forum.mrmoneymustache.com/real-estate-and-landlording/questionsadvice-about-rentals-gt-1031-exchange-gt-rental-gt-primary-residence/

Hi guys.

Nothing really important worth adding here. Kitces post is solid. The stuff I mentioned in the linked post still applies to this situation.

My only caveat to the whole deal is these things aren't fun to calculate. I went down the hall today to discuss a separate issue with a colleague. She and I trade "consultations" regularly when we run into issues. She saw me in her doorway,  gave me a dirty look, and said I hate 1031 exchanges as she was working on one this afternoon.

Good luck!