1031 exchange on a primary residence just got converted into a rental

[qunjie1]

My husband I have lived in our primary residence in the Bay Area for 10 years, the gain is about 1M right now. we move out in 2016 and rented the whole house out for a full calendar year in 2017, in 2018, we are planning to sell that house and buy another investment property (through a 1031 exchange), do you think my husband and I can still claim the 500K principle residence exemption  during that sale, and defer the remaining 500K through that 1031 exchange into the investment house purchase? Thank you very much in advance.

[TaxGuyBill · Accepted solution]

Yes, you can use the $500,000 Principal Residence exclusion and then defer the rest of the gain using a 1031 exchange.  Here it the IRS guidance about that:

https://www.irs.gov/irb/2005-07_IRB/ar10.html#d0e1794

I don't think there is anything definitive about how how it needs to be a rental property before the 1031 exchange, but if it is a rental for more than a year, you are probably okay (if it was two years, you would definitely be safe).

[SweetieJean]

Of course, this assumes no relevant tax law changes.

[Siftin]

We have a similar situation where our primary residence (from Sept 2010 - Oct 2018) was later converted in rental between Oct 2018 - March 2020. We sold the property in June 2020 followed by a 1031 exchange in July 2020. How do we report this sale within Turbotax to make sure that we can get 500K primary home tax exclusion as well as handle 1031 exchange?