I am currently renovating a home that is NOT my primary residence. I bought the house as an investment. I wanted to fix it up and sell it right away (flip) but taxes will hurt my profit greatly. Im trying to find new and crative ways to avoid taxes.
If I were to sell the house im renovating and use a 1031 exchange to buy another property and make that house I buy my primary residence and live in that house for 2 years and sell that house, will my capital gains be tax free? Or will they look back and see that I used a 1031 exchange in the past and tax me on those back capitail gains from the house before that.
2007-07-10 06:49:15 · 3 answers · asked by Anonymous in Business & Finance ➔ Renting & Real Estate
This will work, you can avoid taxes this way, but there is one key point you are missing. When you do a 1031 excahnge, the property you are exchanging into also has to be an investment property. So, you really have to do the 1031 exchange into a new house, rent that house out for a year or so, and then you can kick out the tenant and move in yourself (and get teh 250K deduction after 2 more years living there). This is ok as long as you prove intent to exchange from one investment property to another (its a loophole, but one I've heard of used before). Still this is a bit of work (3 years in the new house - 1 as a rental and 2 as a primary residence) to avoid the taxes, but it should be ok.
I heard of a more extreme case where a guy wanted to move to florida. He sold about 6 rental places and the place he was living in and bought one big house in Fl. Rented it out for awhile (maybe a year,m not sure) and then moved into it. Bingo, no taxes at all (though I suspect when he sold the FL house he still would've paid taxes on part of the sale as I suspect he was well over the 250K deduction limit).
2007-07-10 06:58:34 · answer #1 · answered by Slumlord 7 · 1⤊ 0⤋
Your 1031 exchange has to be "like kind". If you are selling a rental/investment property, you must buy another investment property. You can not make it your primary residence, at least for a few years (may be some wiggle room there). You can go to the the irs website (www.irs.gov) and grab the detailed rules on doing 1031 exchanges (and there are quite a few). Also, to perform the exchange you should contract a "qualified intermediary" (usually a lawyer) that can answer these questions as well.
2007-07-10 07:00:43 · answer #2 · answered by locke@notbigots.com 1 · 0⤊ 0⤋
No, this will NOT work. 1031 exchanges are for like-kind INVESTMENTS only. As soon as you convert one of the investments into a primary residence (which is not an investment) the 1031 bus will shift into reverse and run over you for the favorable tax treatment you received in the past.
2007-07-10 07:55:08 · answer #3 · answered by acermill 7 · 1⤊ 0⤋