If you rented your 1031 exchange house, and then moved into it, then sold it, how is all of this shown in the return so that your gain isn't taxed?

[rahn2886]

Bought house as a 1031 exchange in 2003. Rented it for one year. Then moved in as a primary residence for 14 years. Now am going to sell it and move to a new primary residence.

[DDollar · Accepted solution]

It would be shown as the sale of your primary residence.  The government acknowledged the possibility of this scenario and created a special rule that applies specifically to it. When a property has been acquired through a 1031 Exchange and later converted to a primary residence, the owner faces a mandatory five-year hold period before having the ability to sell obtaining the Section 121 exclusion (the exclusion of $250,000 or $500,000 on the sale of your primary residence). The taxpayor still must satisfy the minimum two of five-year occupancy as primary residence.

Your basis is still the same as the 1031 exchange amount, and you will have to account for the depreciation for the year it was a rental.  If your gain is more than the $250,000 /$500,000 exclusion, then it will be taxable.  If the gain falls within those limits, you won't have any taxable gain.

[808]

Do you have to pro-rate the $250/500K Primary Residence Sale amount by how long it was rented out vs how long it was a primary residence?   For example, if the property was owned for 15 years, rented out for 10 years and then a primary residence for the final 5 years, does the 250/500 apply or is it 1/3 of that amount that is exempt?

[Critter]

no... it is NOT prorated however you still have to recapture the depreciation.

[808]

Thank you. This is good news. We are going to make a decision whether to move into our rental property or not based in part on this.  I don't want to offend, but are you a tax professional?  I understand this is a user forum, but it is big decision for us and I want to feel very confident when making it.  Thank you for your time.