Like Kind Exchange / Cap Gains Exclusion / Old rollover rule

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. :)
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Tell your cousin, the primary residence needs to be rented for 2 or more years (aka showing rental income on 2 years of tax returns on Schedule E) before the home will be eligible for a 1031 exchange gain deferral. There is prop 19 if you are 55 and over to transfer your property tax basis to the new home.
 
usctrojancpa said:
Just remember that you have to wait 2 years between selling 2 primary residences to get that $500k gain exemption.
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It will have been two years when I receive the keys for Cielo. I closed escrow on Bluffs in May 2022 and construction for Cielo is expected to complete June to August 2024. Works out nicely. 😂
 
CalBears96 said:
It will have been two years when I receive the keys for Cielo. I closed escrow on Bluffs in May 2022 and construction for Cielo is expected to complete June to August 2024. Works out nicely. 😂
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You should reread @usctrojancpa's comment more closely. Receiving the keys for Cielo has nothing to do with it. You have to time the closing dates between the selling of Bluffs 2 and your prior home in the IE by a full 2 years or you won't qualify for the 500k exemption at all. If I remember right, you sold that IE home several months after purchasing the Bluffs 2, so this is something you need to pay attention to.

I may have just saved you boatload of money with this comment.
 
Liar Loan said:
You should reread @usctrojancpa's comment more closely. Receiving the keys for Cielo has nothing to do with it. You have to time the closing dates between the selling of Bluffs 2 and your prior home in the IE by a full 2 years or you won't qualify for the 500k exemption at all. If I remember right, you sold that IE home several months after purchasing the Bluffs 2, so this is something you need to pay attention to.

I may have just saved you boatload of money with this comment.
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I sold my Eastvale home in September 2022. I will do some upgrades before moving into Cielo, so it's likely that I won't close escrow on Bluffs until after September 2024.

As much as I've shit on you, I do sincerely thank you for this advice.
 
CalBears96 said:
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:
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Hi CalBears96 - So the capital gains from the 1031 Exchange are never taxed, if the investment home is converted to a primary residence and then sold after 2 years? That's a tempting loophole. 1031 Exchange + $500K Primary residence combo.
 
homesweethome said:
Hi CalBears96 - So the capital gains from the 1031 Exchange are never taxed, if the investment home is converted to a primary residence and then sold after 2 years? That's a tempting loophole. 1031 Exchange + $500K Primary residence combo.
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It's a little more complicated then that. First off, there will be depreciation recapture tax on the depreciation that was taken at 25%. And second, if you convert the home to a primary residence you only get a gain exemption for the % of time the home was used as a primary residence versus being a rental so long as the home was occupied as a primary residence for 2 out of the past 5 year period. For example, if you rented a home for 3 years and then occupied it as your primary residence for 3 years then only 50% of the gain (3 years divided by 6 years) will be eligible for the Section 121 gain exclusion/exemption.
 
usctrojancpa said:
It's a little more complicated then that. First off, there will be depreciation recapture tax on the depreciation that was taken at 25%. And second, if you convert the home to a primary residence you only get a gain exemption for the % of time the home was used as a primary residence versus being a rental so long as the home was occupied as a primary residence for 2 out of the past 5 year period. For example, if you rented a home for 3 years and then occupied it as your primary residence for 3 years then only 50% of the gain (3 years divided by 6 years) will be eligible for the Section 121 gain exclusion/exemption.
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Don't they look at the past 5 years only? Let say you rented out the home for 3 years and then lived in the home of 5 years after that. Would you get 100% of the gain then?
 
CalBears96 said:
Don't they look at the past 5 years only? Let say you rented out the home for 3 years and then lived in the home of 5 years after that. Would you get 100% of the gain then?
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No, they look back at what % the ownership was as a primary residence versus a rental property. The 2 out of the last 5 year rule is used to determine if you qualify for the exemption up to $250k (individual) or $500k (married filing jointly). You can't fully eliminate deferred gains of a rental by converting it into a primary residence and you do have to depreciation recapture tax to deal with so there isn't a free lunch.
 
I need some insights in 1031 exchange. I am planning to sell recently bought property and want to do 1031 exchange. What should I look for in new property?
 
Irvine_Best_Place said:
I need some insights in 1031 exchange. I am planning to sell recently bought property and want to do 1031 exchange. What should I look for in new property?
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In terms of the 1031 exchange rules, your aggregate purchase price has to be equal to or greater than the sales price of the exit property and all of the net sales proceeds from the sale of exit property have to be used. Then there are 2 timing rules, the first one is easy where you have to close on the purchase of the new home/s within 6 months of the sale of the exit property BUT the second rule is much more tricky where you need to identify the home/s that you will be purchasing within 45 days of closing on the exit home and you have to buy one or more of those homes (you can't buy a home that's not on that identification listing). Also, the exchange company fee is around $1,000 +/-.

In terms of what you should look for, I would recommend buying a smaller 3bd or 4bd home, preferably detached, as you'll be targeting move-up renters and it'll appreciate better than a 2bd home because it'll be of interest for move-up buyers.
 
usctrojancpa said:
In terms of the 1031 exchange rules, your aggregate purchase price has to be equal to or greater than the sales price of the exit property and all of the net sales proceeds from the sale of exit property have to be used. Then there are 2 timing rules, the first one is easy where you have to close on the purchase of the new home/s within 6 months of the sale of the exit property BUT the second rule is much more tricky where you need to identify the home/s that you will be purchasing within 45 days of closing on the exit home and you have to buy one or more of those homes (you can't buy a home that's not on that identification listing). Also, the exchange company fee is around $1,000 +/-.

In terms of what you should look for, I would recommend buying a smaller 3bd or 4bd home, preferably detached, as you'll be targeting move-up renters and it'll appreciate better than a 2bd home because it'll be of interest for move-up buyers.
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Additionally, there is rule of renting exit property for at least two years. Can I buy only physical real estate or REITs are allowed as well?
 
Irvine_Best_Place said:
Additionally, there is rule of renting exit property for at least two years. Can I buy only physical real estate or REITs are allowed as well?
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Yes, the exit property has to have been rented for at least 2 years to be able to qualify for a 1031 exchange. Yes you can buy do an exchange into a physical property or an REIT/real estate investment fund.
 
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