Like Kind Exchange / Cap Gains Exclusion / Old rollover rule

irvinehomeowner

irvinehomeowner

Well-known member
So I'm going to ask a newb question because I'm too lazy to Google but if you sell a property for more than $250/$500k profit, can you roll that into two or more properties without capital gains tax?

I should probably know this but I have a relative who might have this type of gain and they are thinking about selling but instead of retiring with the cash (and paying the capital gains tax over the limit), they are looking to buy 2 or more properties (a downsizer for themselves and maybe one more more for their kids/grandkids... probably not gifted as they would still own the properies but give them a place to live).

Does that work?
 
I believe you are confusing tax treatments. The $250/$500k capital gains exclusion applies to a sale of your primary residence and doesn't require you to purchase any new property to get it. It's available to you on the sale of the primary residence and you can repeat this multiple times in your life. To qualify as your primary residence, you must have owned and used the house as your primary residence in a minimum of two out of the five years preceding the sale.

A 1031 exchange, commonly known as like-kind exchange, is for investment properties / rentals. Essentially you roll the gain in the sale of this type of property into the basis of the new like-kind property. You can buy two or more properties on this like-kind exchange, so long as the values are comparable. There are some pretty specific rules to follow, but if the purchases are greater than 200% of the sale price, it's probably not going to work out.
 
Maybe it's better if I spell it out.

They want to sell their primary... and say they make $700k on it... if they don't buy a new house... they get taxed on the $200k. Say they just downsize to a $700k house and put all in there... no tax implications there?

Say they split it up and buy 2 $500k houses ($350k down on each)... no tax implication there? Or... just buy one $500k house, put only $100k down and keep $600k

They're asking me and I have no idea (which is probably something I should start looking into).
 
irvinehomeowner said:
Maybe it's better if I spell it out.

They want to sell their primary... and say they make $700k on it... if they don't buy a new house... they get taxed on the $200k. Say they just downsize to a $700k house and put all in there... no tax implications there?

Say they split it up and buy 2 $500k houses ($350k down on each)... no tax implication there? Or... just buy one $500k house, put only $100k down and keep $600k

They're asking me and I have no idea (which is probably something I should start looking into).
Click to expand...
There is no exchange on primary residence. You get $250k/$500k exclusion and that's it.

As ChiKid24 said, there is 1031 exchange for investment property, but no such thing for primary residence.

If you want to do some kind of exchange, then you need to convert the primary residence into a rental property, sell it and buy another (or couple of) rental property(ies). Then, after 2 years as rental property on the new purchase(s), they can make it primary residence again.
 
irvinehomeowner said:
Maybe it's better if I spell it out.

They want to sell their primary... and say they make $700k on it... if they don't buy a new house... they get taxed on the $200k. Say they just downsize to a $700k house and put all in there... no tax implications there?

Say they split it up and buy 2 $500k houses ($350k down on each)... no tax implication there? Or... just buy one $500k house, put only $100k down and keep $600k

They're asking me and I have no idea (which is probably something I should start looking into).
Click to expand...
This will not work for the reasons the others have mentioned. They would have to move out of their residence, rent it out to convert into a rental (not sure if there is a certain time period that it needs to be a rental) then sell it while it’s an investment property and then do the exchange.
 
See, this is why I'm not a realtor.

I must be mixing up the capital gains things.

Say they just downsize and put the entire $700k profit into a smaller house... they have to pay taxes on anything over $250/500K?
 
I don't think it matters what you do with the money once you sell you principal residence, you have to pay taxes on the sell/gains. With an investment property it would be different.

Edit: If they lived long enough in the house they may have accumulated a nice amount of improvement and repair expenses, that can offset some of the gains.
 
irvinehomeowner said:
See, this is why I'm not a realtor.

I must be mixing up the capital gains things.

Say they just downsize and put the entire $700k profit into a smaller house... they have to pay taxes on anything over $250/500K?
Click to expand...
I've already stated in my previous post. On primary residence, you get $250k/$500k exclusion and THAT'S IT. There is nothing else to it. But, as marmott said, any expenses toward repairs and improvement count toward the cost basis.
 
I must be misremembering something.

I thought if you sold a house and rolled whatever gains into another house you weren't taxed... unless the gains was over $250/500k.

I guess I do have to Google this now. :)
 
irvinehomeowner said:
I must be misremembering something.

I thought if you sold a house and rolled whatever gains into another house you weren't taxed... unless the gains was over $250/500k.

I guess I do have to Google this now. :)
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The rule you are remembering did exist. The tax owed on the gain could be deferred by rolling the gain into the basis on a new home. The new primary home had to be purchased within 2 years of the sale. That rule was eliminated with the Taxpayer Relief Act of 1997 and replaced with the much simpler 250k/500k gain exclusion rule still in existence.

Don't feel bad though. A lot of people who have not sold a home since that time still cite the old rule. My parents included. They were shocked when I told them it no longer existed.
 
Ahh... now this is making sense.

Yeah... they haven't sold a home since before then... and my own sales haven't been above the gain exclusion limit.

Thanks @ChiKid24 , I was mixing the Like Kind Exchange with the old rule.
 
CalBears96 said:
There is no exchange on primary residence. You get $250k/$500k exclusion and that's it.

As ChiKid24 said, there is 1031 exchange for investment property, but no such thing for primary residence.

If you want to do some kind of exchange, then you need to convert the primary residence into a rental property, sell it and buy another (or couple of) rental property(ies). Then, after 2 years as rental property on the new purchase(s), they can make it primary residence again.
Click to expand...

Which is totally not worth it, best to take your $500k tax exclusion because there aren't many ways to make tax free gains in the US.
 
CalBears96 said:
There is no exchange on primary residence. You get $250k/$500k exclusion and that's it.

As ChiKid24 said, there is 1031 exchange for investment property, but no such thing for primary residence.

If you want to do some kind of exchange, then you need to convert the primary residence into a rental property, sell it and buy another (or couple of) rental property(ies). Then, after 2 years as rental property on the new purchase(s), they can make it primary residence again.
Click to expand...

My cousin is hitting me up on this again... can he convert it to a rental, rent it out for a year and then sell and buy 2 other properties?

From what I remember when I sold our rental, there is still some gains tax on the sale.

And now I'm curious about myself... any loopholes when I get into senior years on selling primary home?

Maybe I should ask ChatGPT. :)
 
irvinehomeowner said:
My cousin is hitting me up on this again... can he convert it to a rental, rent it out for a year and then sell and buy 2 other properties?

From what I remember when I sold our rental, there is still some gains tax on the sale.

And now I'm curious about myself... any loopholes when I get into senior years on selling primary home?

Maybe I should ask ChatGPT. :)
Click to expand...
1031 exchange allows you to use the proceeds from selling your rental to buy equivalent investment property(ies) to avoid paying taxes on the gains of the rental property you just sold. After two years, you can convert the new investment property into a primary residence, if you don't want to keep it as investment property. That's probably the loophole you can use when you want to sell your primary home when you get into your senior years. :ROFLMAO:
 
So there is no senior years loophole? So can I do that 1031 thing sooner than later... maybe my cousin is on to something.

But I hate moving... I'll just live in Irvine foreeeeeeevvvvaaaah!

Maybe I should rent Calbear's other PS home. :)
 
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