Home sale - Tax implications

[jawckey]

Pl. clarify this.

- We are a married couple

- Own and stayed in our home for more than a decade and also more than 2 years in the last 5 years

- We recently rented it out briefly for a few months

- Planning to sell the home

- We expect gains to be in excess of tax-free 500K limit, total gain may be about 900K.

- If we do 1031 swap, can we still claim 500K tax-free limit and use the excess 400K to purchase another rental property to postpone tax burden on 400K OR

- If we do 1031 swap, swap will be applied to all of 900K and we no longer will be able to take 500K tax-free limit anymore?

Pl. let us know

regards

[ThomasM125 · Accepted solution]

The like kind exchange option is only available for rental property, and the exclusion of gain on sale of a primary home is only available for sale of your personal residence, so you could not normally claim both on the same property disposal.

If you met the qualifications, you could do a like kind exchange and postpone tax on the gain, but you would then lose the allowed exclusion of tax on up to $500,000 of gain on sale of your personal residence. 

It is possible to convert a primary home to a rental property and later exchange it as such and qualify for the exclusion of gain on sale of primary residence and like kind exchange deferral of gain, but you would not be able to use the house for personal purposes during the year it was rented for more than 14 days or ten percent of the time you had the house rented, whichever is more. So for practical reasons, you would have to have the house rented at least a year with minimal personal use.

Also, you would have to then exchange the house within two years to still qualify for the two year requirement for living in the house for two of the previous five years.

Here is more on the subject:   Rev Proc. 2005-14

@jawckey

[Edited 1/7/2022| 1:26 PST]

[jawckey]

Pl. clarify. So if I decide to 1031 and thus lose the immediate benefit tax relief on 500K, but use only 600K out of 900K gain on the purchase of the new rental property, I pay the usual FED capital gains and state income tax on the rest of 300K. Is that correct?

[Critter-3]

Please talk to a local tax pro who is familiar in 1031 exchanges so you know what you can and cannot do.  

[Mike9241]

as @Critter-3 suggests get tax advice. 

you say you rented it out for a few months but haven't yet sold. so what was its status after the rental stopped and even this presents issues as to whether you need to report the rental on schedule E or its falls under the rules to treat it as a personal residence.. this could preclude using 1031

even if 1031 can be done there are many tax traps for the unwary

if you take possession of any cash or boot, you have gain.

Some examples of boot are:

• Cash received
• Debt reduction (the mortgage on the replacement property must not be less than on the old property)
• Use of sales proceeds to pay off non-transaction costs
• Excess borrowing to acquire replacement property (you take out a bigger mortgage than needed so you can take cash out  of the deal)

• Buying replacement property with a lesser value then the original property
• Receipt of non-like-kind exchange property