My "primary-1031-primary" Story
yr 1965 bot home for $21000
1991 converted home to rental @$50000 cost basis.
2000 did a 1031 $300000 even exchange to another rental house.
2004 Plans are to move into the rental and establish as a primary residence.
yr 2007 Plans are to sell for $550000.
My understanding of the $500000 capital gains exclusion rule for a married couple on a primary residence would mean $0 capital gains would be due on the above senario.. ( for simplicity,I didn't include issues of selling costs,depreciation recapture)
Am I missing anything??
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I don't quite see the detail on how you went from $21K basis in 1965 to $50K basis in 1995. Would you clarify this and also please tell us how your exchange was structured in 2000?
From 1965 to 1995 (30 years), 30 years worth of replacement stuff occurred...New roof, new driveway, replaced furnace, etc which bumped the purchase cost basis by 29000. This had to be established at start of converting to income property for tax purposes...
The 1031 exchange was just a standard sale for 300K and purchase of 300K for the replacement property all done within the 1031 guidelines which transferred the $250K gain to the new rental house.
It appears you have the overview correct. Your basis in the replacement property is $50K. After you convert your property from investment use to primary residence, you can sell it after two years of occupancy and qualify for the capital gains exclusion on the sale of your primary residence.
If you have not made the conversion yet, this would put your sale date not earlier than sometime in 2006 to satisfy the two year occupancy rule. If you are married, AND if you both occupied the property as your primary residence at least two (of the five) years prior to the sale, AND if you file a joint return, then up to $500K of your profit is excluded from capital gains tax.
Remember, that the first dollars of profit are depreciation recapture. The rest of your profit is what gets excluded from capital gains.