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I live in a paid off house in Kansas City Missouri and I have 2 paid off rental properties here also. I eventually would like to move to Delaware. My idea is that I either do a 1031 exchange selling one of the rentals and buying a more expensive rental property in Delaware by about $200,000 more and then some day in the future, maybe in 4 years, move to Delaware and have that property become my primary residence. The alternative is to just sell the house I live in and use that money to purchase a rental in Delaware and then move into one of the rental properties here until that 4 or 5 years passes and then move to Delaware. I am not sure of the implications of moving into a property that was a 1031 exchange. Or for that matter the tax implications of moving into a property that was a rental, making it a primary residence for 4-5 years and then selling to move east. I am aware I would need an attorney who is versed in 1031 exchanges. I haven’t done that quite yet but thought I’d ask here to see if anyone had words of wisdom of how I should swing this conundrum.
Laura, I went back and found an excellent article by Michael Kitces that addresses the tax I’m plications of many of the questions you asked.
Great reference to the on point 2014 Kitces article Rick. That article should give Laura a guide path to the data she needs to gather.
Best, Bill
Thanks Bill
Laura, Dan and William provide good advice. I wrote about some of these issues a few years ago in conjunction with purchasing a home, making that home our primary residence, and converting our previous primary home – a beach town home – into a part-time rental with occasional personal use. At the time I spoke with a 1031 Exchange specialist. They gave me a lot of good, free advice. The rules for pro-rating qualified use (primary home) and non-qualified usage (non-primary home) are complex, even without a 1031 exchange. Best of luck.
Full disclosure, I never prepared a tax return with these issues, and would refer the client to a preparer above my pay grade. That would probably be an Enrolled Agent (EA) with experience doing this type of return.
There are several moving parts to be considered. One is the $250/$500k pass on the profit from the sale of a primary residence. If it’s a house that had been a rental in the past, then the deduction is prorated based on the ratio of time used for each purpose.
The next calculation is the recapture of depreciation from the time it was a rental.
Complexity is further increased if a 1031 exchange is involved.
The best advice I can share is for you to find a preparer that has done these in the past, and to keep fastidious records.
If one of our CPAs wants to chime in, that would be awesome.
I recommend a 2024 article from the AICPA publication The Tax Advisor as a overview you can read here.
That article ends in the following –
Sec. 1031 transactions can be highly technical and complex due to various moving parts that can easily affect the intended outcome. As a result, it is advisable to consult with a tax professional and QI to fully understand the rules and requirements of like-kind exchanges under Sec. 1031.
My words of wisdom is that if you do not have a substantial gain in the potential 1031 exchange to defer it is easy to spend more in professional fees than you may save in taxes. Don’t let the tail wag the dog by reducing future ordinary tax rate depreciation deduction by foregoing current capital gains taxed at a lower or zero capital gains rate. If your current rental properties are single family dwellings I would not expect any unrealized gain to be substantial in my thinking.
Like Dan, I hope our comments help.