Posted by Natalie-VA on September 13, 2006 at 17:15:25:
BC,
I’m not a CPA. You wrote:
I’m now locked into that “2 years as a rental, then 5 years as a residence” gotcha.
Just to clarify, the total holding period needs to be 5 years, not 2 years as a rental and 5 years as a residence. In other words, you can rent it for 2 years, and then live in it for 3 and you should be okay.
Also, you might want to check on renting to your adult son…I’m not sure if the rules address that or not.
–Natalie
1031 Exchange – possible? - Posted by BC
Posted by BC on September 11, 2006 at 07:51:12:
Three years ago, my wife and I moved to another city. Housing values were rising like a rocket, and we could rent it out for more than double what our mortgage payment was, so that’s what we did. Six months ago, we listed the property for sale, thinking that we’d sell it quickly, and we’d qualify for the exemption from capital gains taxes on our personal residence.
Unfortunately, the market has slowed down rather abruptly, and even though we’ve reduced the price a couple of times, it doesn’t look like it’s going to sell (and close) within our 3-year window. My understanding is that we have to have been living in the house for 2 of the last 5 years, so after we’ve been out for more than 3 years, our exemption goes away.
We’re planning to use the proceeds from the sale to purchase another personal residence (we’ve been renting ourselves for the past 3 years). Since we’ve been renting our former residence out for almost 3 years, it qualifies as an investment property. If we do a 1031 exchange to buy another “investment” property, how long do we have to wait before we can move into it as our personal residence? I appreciate any comments and suggestions.
Re: 1031 Exchange – possible? - Posted by arlan
Posted by arlan on September 13, 2006 at 15:49:35:
It seems that you would transfer the house to a rental at FMV at the time of transfer. To me, and if you never get audited by the IRS, I would say that the FMV at that time is still the same as today. Therefore when you sell it you have no real gain. To pay any taxes on any realized gain, it would be based on the change for the conversion date to now. Who determines that. You, unless the IRS audits your return and says that you chose a wrong amount. I would not advocate cheating, but I would also take advantage of the grey area of home valuation.
Re: 1031 Exchange – possible? - Posted by dealmaker
Posted by dealmaker on September 11, 2006 at 14:25:33:
Anyway to include a “buyer’s bonus” for someone to get it closed within your time window? If not then you have to analyze if the realized increase makes it worthwhile to do the exchange, which depends on how much of that “values were rising like a rocket” sticks.
When you do a 1031 exchange ALMOST EVERY TIME is spelled out, EXCEPT the one you are talking about, ie; how long to have it as a rental before you move into it. The “rule of thumb” is two TAX YEARS, that is having it show up as a rental on two tax renturns.
When we did one of these it was only rented for 18 months but was on THREE tax returns, and we never had a bit of trouble.
One other consideration is this; when you do a 1031 exchange and move into the acquired ppty, the “holding period” for a later Section 121 rule (2 of 5 years) becomes FIVE YEARS.
Good luck
dealmaker
Re: 1031 Exchange – possible? - Posted by Natalie-VA
Posted by Natalie-VA on September 13, 2006 at 17:16:23:
Arlan,
How does transferring the house to a rental change your basis in the property?
–Natalie
Re: 1031 Exchange – possible? - Posted by BC
Posted by BC on September 12, 2006 at 08:20:12:
A “Buyer’s bonus” sounds like the best idea. I think I understand what you mean about “realized increase” and “how much sticks” – if I exchange to avoid 15% capital gains on the profit, and then values decline 20%, I’m not only financially worse off, I’m now locked into that “2 years as a rental, then 5 years as a residence” gotcha.
Even if we rent it to our adult son, and he lets us stay as his guests, there’s that 5 year holding period. While we expect to be stable for at least that long, life can throw a curve ball sometimes.
I appreciate this advice from one who’s been there. Thanks, Dealmaker.