1031 Exchange


L

LB

I currently have a rental that I want to trade up using the
1031 Exchange. I plan to rent it for 2-3 years, then move
into it as a primary residence. If I live in it for 2 years
do I avoid the cap gains tax on it?

Thanks,
LB
 
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D

Drewremedy

I currently have a rental that I want to trade up using the
1031 Exchange. I plan to rent it for 2-3 years, then move
into it as a primary residence. If I live in it for 2 years
do I avoid the cap gains tax on it?
There were proposed rules which didn't pass which would have
permitted such a conversion . My laymans read is that you
are safer to the extent that your original intention is
clearly for rental/investment purposes and that any personal
use is as far downstream as possible and not part of your
original intent..

When you sell a personal residence that had a prior rental
history your capital gains is tax free up to the limits
under the 2/5 rules, but there is a recovery of depreciation
you took post enactment of the law (about 1998) that you
must factor back in.
 
A

Arthur L. Rubin

LB said:
I currently have a rental that I want to trade up using the
1031 Exchange. I plan to rent it for 2-3 years, then move
into it as a primary residence. If I live in it for 2 years
do I avoid the cap gains tax on it?
As I said in the junior group -- some tax experts would
say that your intention to move into the latter property
makes it non-business property and hence ineligible for
a 1031 exchange.

If that's not the case, then the sale of the new property
would be eligible for the section 121 exclusion of
up to $250,000 of capital gain. However, that component
of the gain consisting of depreciation after 5/6/97
(probably including depreciation on the former rental)
is not excludable, and taxed at a maximum of 25%.
 
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N

Nan Eklund

Not entirely. You have to pay tax on any depreciation
claimed (or claimable!) since May 1997 including the
depreciation from the previous property. I think at 28%
but someone else should check that.

Nan, EA in LA
 

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