Capital gains

[Jino]

If I sell my primary residence before the 2 year requirement but use all proceeds to by rental properties do I still have to pay capital gains?

[DoninGA]

If you have taxable capital gains from the sale of your primary residence, capital gains taxes are owed.  What you do with the proceeds of the sale is not relevant.

[maglib]

You could do what is called a section 1031 exchange to defer the gains but, you must hire a 1031 qualified intermediary... you would have to have it as rental for rental.  So possibly convert primary to rental first. TT article:https://turbotax.intuit.com/tax-tips/investments-and-taxes/what-is-irs-form-8824-like-kind-exchange/...

IRS regs: https://www.law.cornell.edu/uscode/text/26/1031

[Carl]

You may find a 1031 exchange in your particular case won't work or even be possible. A 1031 exchange is for "like-kind" property. Since your primary residence is not income producing property, doing an exchange for rental income producing property may not be possible. If it is, then you may find it will not have the outcome you may desire.

IRC Section 1031 allows for tax deferral on the sale of a property used in a trade or business or held for investment when exchanged for like-kind replacement property to be used in a trade or business or held for investment. Section 1031 only provides for tax deferral as the original basis is carried over into the replacement property and capital gain taxes are owed when the replacement property is later sold and cash is received.

Section 121 allows for tax exclusion on the sale of a principal residence when the taxpayer lives in the property as their residence for two out of the past five years. Understand that does *NOT* mean you have to own the property for 5 years. If you own the property for 2 years and it's your primary residence for those two years, then you qualify for the capital gains exclusion.

Now everything you read refers to years. But the IRS counts days. So if it was your primary residence for a minimum of 730 days and you owned it "at least" 730 days, counting back from the closing date of the sale, you qualify for the exclusion.

The day of your closing when *you* purchased the property counts as a lived in day. The day of the closing when you sell the property does *not* count as a lived in day.

[tagteam]

A 1031 exchange is absolutely not possible given this scenario.

1031 exchanges are only available for real property held for productive use in a trade or business or for investment. In that event, the real property must be exchanged for real property of like kind which is to be held either for productive use in a trade or business or for investment.

[maglib]

I didn't paste last sentence.  My bad, I edited. They can convert the primary first to rental then do the exchange, will take time.

[Jino]

I just thought of something I hadn’t before. Is it still gains if my profits from the sale are less than the money I put down. Between down and fees I put out around 54k. If I sell I stand to walk away with 45k. 

[tagteam]

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@Jino wrote:

I just thought of something I hadn’t before. Is it still gains if my profits from the sale are less than the money I put down. Between down and fees I put out around 54k. If I sell I stand to walk away with 45k. 

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Your cost basis is not just your down payment and closing costs; your basis is what you actually paid for the house plus improvements during your period of ownership.

Simplified example: You put $52k down, had closing costs of $2k for a total "down and fees" of $54k but you also took out a mortgage for $100k. Your basis is $154k. If you then sell for $199k (after selling expenses), you have a gain of $45k.