rental property and LLC 1031 exchange

[tagteam · Accepted solution]

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@chutki0700 wrote:

Can I buy another rental property through 1031 exchange using a proper intermediate  1031 exchange company.  Then sell it off in 1 year?

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Yes, you can do a 1031 exchange and then sell the replacement property after one year but you need to understand that you will have to recognize any capital gain (and recapture) at the time of that sale (i.e., for that tax year).

A 1031 exchange only delays recognition of gain, it does not eliminate it forever.

[chutki0700]

Appreciate. All I am trying here is to understand the law of 1031 to save on capital gain tax. 
if I buy investment property through 1031 exchange how long I have to hold it as investment property before I can turn it into primary residence and how long I have to live in it before I can sell it to avoid the capital gain tax

[tagteam]

You need to discuss your scenario with a Qualified Intermediary (aka1031 exchange accommodator). You can find one in your area through a simple internet search.

Beyond that, there is really no way to avoid depreciation recapture and capital gain (for the period the property was used for rental purposes) when you eventually sell the replacement property. 

If you convert the property to use as your primary residence, then you may qualify for the two out of five year home sale exclusion (but you will still have disqualified use and there is a mandatory five-year holding period before the exclusion kicks in).

See https://www.irs.gov/taxtopics/tc701

There is no specific time frame before conversion from investment to personal use, but extreme caution should be exercised in this regard. Many facilitators recommend one year, but shorter periods have been allowed.

In this regard, see https://www.irs.gov/pub/irs-drop/rp-08-16.pdf for reference.

[chutki0700]

Appreciate your suggestions.  But I feel that you all know better than these 1031 exchange companies. I spoke to them and they all give different answers. They are not 100% sure of their answer 🤦🏽‍♀️

hence I thought I can ask here.  

[tagteam]

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@chutki0700 wrote:

hence I thought I can ask here.  

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Which is fine, except you might want to seek guidance from a tax professional in your area.

[Carl]

All I can tell you for sure, is that a 1031 exchange is not a DIY project. The transaction must be handled by a 3rd party referred to as a "Qualified Intermediary", with no vested interest in the transaction. This is an IRS requirement; not a taxpayer choice. https://www2.1031dst.com/a-guide-to-your-1031-exchange?utm_medium=ppc&utm_campaign=Fortitude+%7C+103...

[tagteam]

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@Carl wrote:

The transaction must be handled by a 3rd party referred to as a "Qualified Intermediary", with no vested interest in the transaction. This is an IRS requirement; not a taxpayer choice. 

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Using a QI is not "an IRS requirement"; it is highly recommended in most instances.

What is required is following Section 1031 of the Code and Regulations to the letter.

[chutki0700]

Now per my understanding I have to use a 1031 exchange company to buy a similar investment property and rent it out for 2 years before I can turn into primary residence.  Then I have to live there for 2 years and then I can sell it and take the benefit of Tax    Am I correct?

[tagteam]

You basically have a five-year holding period if you convert the replacement property to your principal residence in order to take advantage of the Section 121 exclusion, and you still have to live there as your main home for two of the five years leading up to the sale.

[tagteam]

The two-year period is a safe harbor (as stated in the Rev. Proc., there will be no IRS challenge).

[Mike9241]

@chutki0700 confer with a real estate lawyer.  

this is a public forum.  any member can provide answers. some may be opinions and not conform to the tax laws.  use at your own risk. 

[chutki0700]

My experience with few so is not good.  I guess I get more accurate information here than them

[tagteam]

@chutki0700 I agree that you should consult with an experienced tax professional in your area (whether that is an attorney or otherwise).

I disagree with @Mike9241 in the sense that his post implies that no one on this board is an attorney, specializing in real estate or taxation, a licensed real estate broker, or similarly qualified professional (although the users on this board are indeed "anonymous"). In fact, some who post here hold (or have held) multiple professional licenses.