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Old 07-27-2012, 10:15 PM
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1031 California

Hello,

I am in California and we are selling our rental. We are using that to purchase another home out-right.

A tax guy out here indicated to me that we could move into the residence and convert our primary home to the rental to satisfy the 1031. Is that true?

Also, from a tax stand point would it be better to move into the new property and rent out our current residence for 2 years? How would that affect us?

Any guidance is appreciated.

Thanks



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Old 07-28-2012, 04:07 AM
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Posts: 5,236
“I am in California and we are selling our rental. We are using that to purchase another home out-right.A tax guy out here indicated to me that we could move into the residence and convert our primary home to the rental to satisfy the 1031. Is that true?”----> you can rent out your new primary home prior to its sale and still qualify for the home-gain exclusion of $250,000 ($500,000 in the case of a married couple filing jointly). A lot of people choose to keep their home for a period after moving out because they may want to return or the real estate market might not be appropriate. The law states that as long as you have owned and used your former home as your main home for two of the last five years when it is sold you qualify for the exclusion. When your home is offered for rent and you have moved out, you can begin claiming depreciation deductions for the original cost of the property (or if lower, its fair market value). These depreciation deductions are claimed on Sch E where the property's income and deductions are reported. The depreciation deductions lower the cost of the property for determining gain later on at its sale. Additionally, the amount of depreciation claimed is income at the time of the sale that does not qualify for the exclusion. In effect, you are claiming deductions during the rental that later you will have to report as income. However, this is beneficial in most cases, since you get current deductions at your current tax rate and later will claim the amount as income subject to a maximum tax rate of 25 percent. The purpose of a 1031 exchange is to sell one piece of property and use proceeds to purchase another piece of property without having to pay capital gains tax on the sale of the first property. Section 1031 of the U.S. Tax Code authorizes these types of tax-free transactions. The rules in Section 1031 are strict and any mistake in applying the rules will result in capital gains tax on the sale of your property. UNLESSS your LTCG on the sale of primary home exceeds $500K as MFJ(OR UNLESS you keep the rental pty even in the future), 1031 exchange may not necessary for you;rental properties can be sold as part of a like-kind exchange to defer both capital gains and depreciation recapture taxes. In the interview for selling your primary residence as rental pty, you'll be asked if you ever rented the property and your answer would be yes. You will then simply be asked to enter the depreciation you took for the rental time or part. That amount of the gain will be subject to tax at 25%. The balance of the gain can qualify for exclusion
“Also, from a tax stand point would it be better to move into the new property and rent out our current residence for 2 years? How would that affect us?”---->As described above;



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