1031 Exch. To Primary Res, Avoid Depreciation Prior To 1997
I purchased a second single family residence in 1977, converted it to a 3 family house and have been renting it ever since. I fully depreciated the home after 15 years ending in 1992. The Home was purchased for about $25,000 in 1977. Here are my 2 scenarios:
First Scenario:
Can I sell my current primary residence, take my 500k exemption from the sale and then move into my 3 family house. I would no longer rent any of the units and just use all three floors as my own. After 2 years of living there, I would sell the house and again claim the 500k exemption resulting in little or no capital gains.
3 Questions:
1) Can this be done?
2) Is there any tax on the depreciation portion of the capital gain since all of it was all taken prior May 6, 1997 or is that depreciation exempt and all gains are considered capital gains which are waived up to 500k?
3)If the above is true, and the house sold for $550,000 would the taxable gain be $25k or $50k assuming no Real Estate Sale expenses etc.
Second Scenario:
Can I sell my 3 family house (lets say $550k) using a 1031 exchange and purchase a new single family home (for $560k) with the intent on using it as a rental property. After a year or two of renting, sell my current primary residence, take the 500k exclusion move into the rental and now use it as my primary residence. After a total of 5 years of living and renting, Sell the new single family and again claim the 500k exclusion for a primary residence.
2 Questions
1) Assume no depreciation was take on this new single family, would I still be able to exclude the depreciation taken on the old 3 family rental prior to 1997 and only pay tax on gain beyond the 500k threshold?
2) When selling the new home (Assume it sold for $700k) what would be considered the capital gain?
Thanks
Quote:I purchased a second single family residence in 1977, converted it to a 3 family house and have been renting it ever since. I fully depreciated the home after 15 years ending in 1992. The Home was purchased for about $25,000 in 1977. Here are my 2 scenarios:
First Scenario:
Can I sell my current primary residence, take my 500k exemption from the sale and then move into my 3 family house. I would no longer rent any of the units and just use all three floors as my own. After 2 years of living there, I would sell the house and again claim the 500k exemption resulting in little or no capital gains.
3 Questions:
1) Can this be done?
2) Is there any tax on the depreciation portion of the capital gain since all of it was all taken prior May 6, 1997 or is that depreciation exempt and all gains are considered capital gains which are waived up to 500k?
3)If the above is true, and the house sold for $550,000 would the taxable gain be $25k or $50k assuming no Real Estate Sale expenses etc.1. Yes, but with some restrictions (see #3 for more detail). If you are a single taxpayer, then your maximum capital gains exclusion is $250K. If you are married AND if your spouse also occupied the property as his/her primary residence for 2 of the 5 years prior to the sale, then the capital gains exclusions for each taxpayer can be combined for a maximum exclusion of $500K when filing a joint tax return.
2. Depreciation prior to 1997 is an adjustment to your cost basis but is not subject to recapture.
3. Provided the three family property is three separate and segregated dwelling units, then you can really only live in one unit at a time. If the three family property is really three separate floors within the same dwelling, then you can make a case for using the entire property as a SFR.
There is a difference between having a dwelling unit with a separate entrance with no interior access from other units, and having (for example) a basement apartment that is only accessible through the main house. In the first instance, the separate dwelling units that you do not physically occupy are each individual investment properties (as if they were separate structures). In the second instance, the dwelling unit is an integrated component of a single structure.
In the first instance, you would have one residence unit and two investment units. In the second instance you would have one residence unit and no investment units. Just to be safe, I would convert the 3-family back into a SFR.
Quote:Second Scenario:
Can I sell my 3 family house (lets say $550k) using a 1031 exchange and purchase a new single family home (for $560k) with the intent on using it as a rental property. After a year or two of renting, sell my current primary residence, take the 500k exclusion move into the rental and now use it as my primary residence. After a total of 5 years of living and renting, Sell the new single family and again claim the 500k exclusion for a primary residence.
2 Questions
1) Assume no depreciation was take on this new single family, would I still be able to exclude the depreciation taken on the old 3 family rental prior to 1997 and only pay tax on gain beyond the 500k threshold?
2) When selling the new home (Assume it sold for $700k) what would be considered the capital gain?1. The question is a little vague here. If you use the new single family as a rental for a couple of years before converting it to your primary residence, then the depreciation you should have taken will still be recaptured when you sell the property.
2. You exchanged the 3-family property for the single family property with a 1031 exchange. Your cost basis in the 3-family becomes your cost basis in the new replacement property plus any new money you added to the deal. In this case, you said that the 3-family had been fully depreciated to a zero cost basis for the structure. So, whatever land value you originally had in the relinquished property (probably about $6K.since your original purchase price was $25K), plus the $10K you added to the deal to purchase your replacement property becomes your new cost basis -- about $16K in this example.
When you convert this new rental property to your primary residence and complete five years of ownership and two years of occupancy, you are eligible for the capital gains exclusion. Once again, the $500K maximum exclusion is only available to married taxpayers filing a joint return.
Your profit on the deal will be $700K minus $16K (your cost basis), plus allowed depreciation during your period of rental use. The profit attributed to allowed depreciation will be recaptured at 25%, the profit attributed to appreciation that exceeds your $250K/$500K capital gains exclusion will be taxed at 20% (maximum long term capital gains tax rate increases to 20% in 2010)
[ Edited by NewKidinTown2 on Date 04/01/2005 ]
Quote:2 Questions: If we wanted to do a 1031 for lets say a 2-5 unit rental or maybe 2 separate ”lake community” homes, or one “lake home” and on SFR to be used as a rental.
Q1) Is one unit for multiple units allowed (I believe it is)Yes, you are allowed to acquire multiple replacement investment properties while only relinquishing one investment property. The exchange rules allow you to identify up to three replacement properties without restriction. To complete the exchange you must acquire one or more of your identified properties.
Quote:Q2) How long would we need to hold those before we could do another 1031 to say maybe our retirement home (with the initial INTENT to rent of course!) is it 1,2, or more years ? The holding period is not clearly defined in the tax code. Most advisors suggest holding for one year and one day.
The problem with serial exchanges with short holding periods is that you appear to be using the exchange to shelter active income from a property flipping strategy. If the IRS determines this to be the case, the IRS will disallow the exchanges and recharacterize each sale as a taxable transaction..