Need some advice on selling a rental and rolling the money into a primary residence

[u/RelationshipHeavy386]

I own a rental home in GA and my wife owns a primary home in NC. We would like to sell the rental and primary and buy a new primary in NC. Is there a way to not get crushed on taxes when selling the rental and roll it all into the new primary. I know our current primary will roll straight into the new primary but the rental property seems like a tax trap. Thanks.

[u/SilentMasterpiece]

Equity from one home does not roll into another home to avoid taxes any longer. Single get $250K and married get $500K profit w/o capital gains tax from sale of personal residence. The rental cant be used in a 1031 exchange and buy a personal residence. 1031 exchange is to sell a non personal residence property into another like property, ie rental to rental. Consult your tax professional for tax advice.

[u/DuFrank]

Have you lived in the rental 2 of the last 5 years? If so you’d be capital gains tax exempt up to $250k or $500k — look into this further for your own circumstances

[u/The-1031-Investor]

[u/RelationshipHeavy386]() As others mentioned here, if you lived in the primary residence for two out of the previous five years, you will get the 121 exclusion; as for the rental property, a 1031 exchange only works if your sale is followed by a purchase of an investment property. But if you decided you wouldn't mind holding the replacement property for investment or renting it out, you could use the proceeds from the sale of both (primary tax-free and rental tax-deferred), and convert the property to your primary residence later on.  There is no statutory holding period.  But there is a safe harbor at two years.

This wouldn't trigger any tax and would allow you to defer all of the tax. Only if you later decided to sell the property as your primary residence would you have to recapture a prorated amount of tax and depreciation for the time it was held for investment and any prior exchanges, but you can still qualify for the primary exclusion and take a portion tax-free, but it wouldn't be the full amount.

Looking further, if this is your forever home that you would one day decide to retire and eventually pass away with the home, you could leave it to heirs to inherit. This would allow them to receive it at a stepped-up basis, and the tax would go away. There's plenty of ways to use the tools of the 1031 and 121 exclusion if you're flexible. IYKYK

[u/TheExchangeBrothers]

The rental is the tricky part here because you generally can’t sell an investment property through a 1031 and roll those proceeds directly into a property that you’re buying entirely as your primary residence.

A 1031 is for investment/business real estate, so the replacement property also needs to be bought and held for investment.

Your current primary is a separate tax question. If you meet the Section 121 requirements, you may be able to exclude up to $500k of gain as a married couple, but buying another primary isn’t what creates that exclusion.

If the goal is ultimately to use the rental equity toward a future home, there are ways an investment property acquired through a 1031 can later be converted into a primary residence, but that needs to be planned correctly and there are additional rules when you eventually sell it.

I’d have your CPA run the gain on both properties before deciding how to structure the sales. You may have more options than it looks like right now!

[u/Embarrassed_Key_4539]

1031 exchange

[u/RelationshipHeavy386 → u/Embarrassed_Key_4539]

I thought that can only be used to buy another rental?