Primary Residence VS Rental Property

irondude22 profile photo

I have recently purchased a second home and am turning my previous home into a rental property. I have owned the first home for 18 months and would like to sell in a year, my question is this: If I make my new purchase my primary residence (ie change my mailing address etc.) how does that affect me tax wise when i sell the rental? I think i understand the 1031 rule but i want to avoid paying capital gains when i sell the rental. do i have to keep the rental as my primary past 24 months to avoid paying capital gains?

Comments(4)

  • irondude2222nd November, 2005

    Could i still do a 1031 on the first house if i do not keep it as my primary residence?

  • krish22nd November, 2005

    I did the same with my principal residence.
    Now, if it does cash flow positive, why sell?
    You can still get a Heloc and tap the equity to purchase
    more if need be.

    Here is another angle.
    Every year, we also get a depreciation on
    the property if it is a rental.
    Lets say, the 3 year window
    passes on. Now, when we sell after
    3years say using a 1031, does the depreciation get
    recaptured by IRS??
    If there is no recapture, that is great. One can at the
    end of say 10 or 15 years sell and then 1031 the
    entire gain to another property. Rent the new one out
    for a year, then move into it and make it a primary
    residence.
    Any thoughts?
    -Krish

  • NewKidInTown322nd November, 2005

    Quote:Every year, we also get a depreciation on
    the property if it is a rental. Lets say, the 3 year window passes on. Now, when we sell after 3 years say using a 1031, does the depreciation get recaptured by IRS??No. If you use your rental property as the relinquished property in a properly structured 1031 exchange, the depreciation taken on the relinquished property is transferred to the new property. The depreciation recapture is simply deferred until the replacement property is sold in a taxable event.

    Quote:If there is no recapture, that is great. One can at the end of say 10 or 15 years sell and then 1031 the entire gain to another property. Rent the new one out for a year, then move into it and make it a primary residence. Any thoughts?After you convert a rental property to your primary residence, depreciation taken since May 1997 is still recaptured when the property is sold in a taxable sale. Only capital gain due to appreciation is excluded from capital gains taxes under Section 121.[ Edited by NewKidInTown3 on Date 11/22/2005 ]

  • wexeter29th November, 2005

    Also, new IRS Revenue Procedure out this year allows an investor to move out of their primary residence, convert it to rental property, hold as rental property for say 12 to 18 months to qualify as held for rental property, and then sell. Upon the sale, IF YOU QUALIFY for both Section 121 Exclusion and Section 1031 Exchange you can take the $250K/$500K exclusion AND complete a 1031 exchange to defer the capital gain and depreciation recapture remaining.

    In this case, you only lived in the property for 18 months, so you would not qualify unless you lived in it for an additional 6 months for a total of 24.
    [addsig]

Add Comment

Login To Comment