Convert a 1031 Exchange Property to a Primary Residence

What are the requirements to convert a 1031 exchange replacement property to a principal residence combining Section 1031 and Section 121 of the tax code to defer taxes?

[@melissa-qu9tf]

Out of all the videos I've watched on 1031 this is the first one that explains this part of it so thank you very much it's exactly what I was wanting to know about

[@philatwan54]

This is a very delicate and difficult question - especially when it comes into a Tax Audit. Generally speaking, this is a decision in which only a license tax accountant or attorney can give or make; and NOT you or I. The following is what both the spirit and the letter of the code seems to indicate. It is possible to convert an Exchange property into one’s principal residence after 2 full years of renting; but at the time of the Exchange. The IRS expects a taxpayer to Exchange and acquire a “Like Kind Investment Property”; to HOLD for INVESTMENT with no intent to convert into personal use. However, life can certainly change with no warning; i.e. illnesses or disabilities, perhaps financial hardships, or even family changes (I.E., such as death or divorce). These unplanned or unexpected or unforeseen changes may be a cause for conversion for personal use, I hope this helps clarify the subject.

[@jdmxxx38]

Amazing video. In one viewing I got perfect clarity on the topic. Thanks and well done.

[@MetalBum]

How about if you are living in a duplex you rent out other side. Can you live 2 yrs in one unit then 2 years in another principal residence while you rent out the other unit Can you use sec 121 for 100%??

[@atexan969]

Thank YOU! You have informed me more than anyone out there. Thank you!

[@GunnyArtG]

Thanks for the good info. We are reaching retirement and have a remote 40 acre property that is paid off. We would like to use the sale of that property to buy a closer but smaller piece of property and build a home to retire to on it. 1) does the purchase price have to be equal or greater than the sale price or can we use a portion of the proceeds to improve the new property? 2) could we say for example lease grazing rights to the new property for 2 years while we build on it to satisfy the investment requirement?

[@braceyourselvesfortruth2492]

What about depreciation recapture? Would that be considered capital gain along with value appreciation of the rental?

[@sandiegobookscout9394]

Thank you. You clarified it all very well.

[@Eaglejake]

I learned a ton. I appreciate the use of the erase board. Great technique when explaining this concept. I think I got it!!

[@timdolan4591]

Good talk. However I think the 10 year hold example would’ve been better on a separate line rather than scribbling on top of the five year example.

[@kevinfarrell2897]

1031 doesnt have to be equal or greater value. It can be any amount, its just that you would be on the hook for cap gains tax for the difference. Also it can be multiple properties not just one.

[@TonyPuppets]

I believe he forgot to include the number of years it was a rental prior to the 1031 exchange. That would drastically change the percentages mentioned.

[@matthewreichlin4993]

If I'm understanding you correctly, prior to the 1031 exchange, it doesn't matter what it was because you didn't own it. Am I understanding it correctly?

[@candecarro]

My thought exactly: property purchased with a 1031 Exchange in 2006. Rented out for 12 years. Moved into the property as primary residence in 2018. Has been my primary residence for 5 years (it’s 2023). What is my tax liability relative to the 1031 Exchange?

[@jhumphreyw]

What if I’m not able to rent it in the 2years ? What can happen if I have the intent to rent it but don’t find the right tenant move in for 8 years but I never rented it..

[@myagenthouston]

if i move into a rental that was NOT purchased through 1031, does the prorate still applies? this is the scenario. I bought a primary residence and lived there for 2 years then rented it out for 5 years then moved in to the house and lived there for 2 years and sold it.

[@philatwan54]

Further more, the code specifically states that the replacement property needs to be purchased as "Like Kind", which means no intent to convert or move in.

[@cristinacruz750]

our PR title is no longer under the FLP title. It was changed to Living Trust 4 weeks ago,

[@not1but2and37]

Thank you very much for this information. Does it apply for a second home, not a primary residence?

[@lprice5583]

I need a video for this applied to a 4plex where I am living in one unit and renting out the other 3 units.

[@GerryYen]

What happens to depreciation recapture?

[@softailryder6495]

Always wondered about this exact example! Thanks!

[@EmunahNo1]

Great explanation. Thank you!

[@tstrat124]

When you say "taxable gains" when talking about the fraction of years...etc, is that defined as the TOTAL gain (Gain from original sale then 1031 + gain from primary residence), or just the gain from sale of primary residence?

[@mercedesbouchard5118]

what happens if the rental property is rental for 17 years and now is your primary residence for 4 years what is the percent on capital gains this was 1031 exchange on the rental property

[@myracochran3798]

Is it possible to do this in reverse? Principal farm sale to a 1031?

[@chinhtran896]

Thank you for the education, it is extremely valuable. I have a question that hopefully you can answer. I purchase a rental in California in 2019 for $470, sold it for $569K and I did a 1031. I want to my a million dollar home with a partner where the partner will own 30% which is 300K and I own 70% which is $700K, is this possible to do this?

[@adamwiggins1787]

Thanks for these videos Mr. Holloway. The series was very informative and you made everything easy to understand.

[@marekstawiarski9248]

Superb explanation. Thanks!

[@fredcdobbs823]

If you loved in it for ten years, would you then reach a 100% untaxable basis?

[@cristinacruz750]

My husband and I formed a FLP. A few of our properties title was under our FLP. Our residentail property which we lived for over 25 years was not. The residential property was under our personal names Two years ago, we sold one FPL property which was a rental. We exchanged this FLP property to buy our residentail property, so we stayed as renters. If I sell this residentail property ( PR) to take advantage of the tax benefits under this 121 tax code, can we claim our past years of stay as part of the 5 year requirement?

[@etutlf4176]

Excellent video. 2 questions: If we are starting with a rental property, why do we need to do the 1031 exchange first into a second rental property? Why not move into the first rental property? Second: Assume one has had a rental property for a long long time. Upon the death of the parent who owns the house, does the house now get a step up in basis when the children inherit the property? Can the son/daughter now sell this property with no capital gains tax?

[@lucilaroncancio5620]

I wandered if you can tell me how property taxes work if I move into my now rental property and use as my primary residence in Florida it’s true that property taxes get cut in half? Thank you

[@donsergio2406]

Interesting video! Who would you recommend for a 1031 exchange? I have an investment property in TX and I am planning to sell this year.

[@suewittmer8155]

Can you do a 1031 and buy a 2nd home? Not a Primary residence but a 2nd home?

[@HeloNova]

For a second home or vacation home to qualify for a 1031 exchange under IRS safe harbor rules, it must be owned for at least 24 months prior to the exchange, rented out at a fair rental rate for 14 days or more each of those two years, and occupied for personal use for 14 or fewer days each year, or no more than 10% of the number of days rented during a 12-month period

[@danw283]

My question is once you are living the the stepped up house as a rental - in theory you should be able to deduct/itemize any repair costs, improvements, and depreciate it if it is in the titled name of the LLC. Is my understanding correct?

[@Ed-zj1vu]

Great video. You answered all my questions. Thanks

[@harutanaka3647]

Is it possible to do 50% 121 Exclusion and 50% 1031 Exchange on single property to reduce risk from market drop?

[@ingridkehlhofer8730]

Very well explained!

[@Charles-in3zt]

Can you sell a business property and then purchase a rental property and then do this?

[@AugustaPrepper2208]

So when you sell after 10 years you could invest the 20% towards another 1031 property?

[@richardsanchez7035]

Great video!

[@dianechristine1388]

Excellent video. Thank you.

[@rajkumarisen3867]

Very helpful! Thank you

[@rajkumarisen3867]

Sir do you have a video about my situation: My primary residence for 7-8 years and rented until now which is May be 13-14 years. If I sale this rental house what happens to depreciation and capital gains? Is it help if I go there and live there? Thank you 🙏

[@buyerofsorts]

Wow, that was good stuff! Thanks for the video! :)

[@kidbowjb]

Where did you get the 80%

[@TEBCO123]

What about recapture depreciation?

[@PhilosophySama]

Wonderful lecture

[@rayalvarez1358]

Does the 121 work the same for a second home?

[@9595david]

7:30 the look when my clients ask if they can use a 1031 when selling their primary residence😂

[@elianaujueta3033]

Excellent!!!

[@lc8945]

Is 2 years mandatory?

[@jordir.8750]

Does anyone know if this still valid for year 2020?

[@B1GJOHNSTUD]

or 2021?

[@jga926]

Is this valid for 2021 or did the tax code change?

[@alexg8460]

2022?

[@bmwbaker]

Very good information. Thanks.

[@goldiefreeman8693]

Thanks for sharing

[@tombrownrigg8794]

Thank you Sir

[@KenReal-g7s]

How about if you have primary residence and you decided to do a 1031 exchange to buy another primary residence

[@carlosperochena2901]

no need to do a 1031, the potentiak xapital fains get "automatically" deferred subject to the 250/500 tax trwatment when you sell the last residence

[@t-techvids9659]

What if you purchase a duplex? and only one unit is the rental unit and you live in the other unit?

[@WakieUppieYall]

I doubt that would count

[@rjam]

1031 rent 2 yrs, can then make it primary residence, if line in it for 3 yrs, can get 60% tax free under Sec 121, but must pay 40% capital gains, if line in house longer get more tax free

[@tessjones5987]

Thank you. I am considering doing this and was not sure how it worked. Great instruction.

[@cameronlovett8998]

does anyone know if there has been any changes in the tax code? Is this still correct

[@gooddog9808]

It is still correct. If you ever think of doing a 1031, I would highly recommend Paul. He has done two of mine and he is excellent. He moved on to a different company, but he is not hard to find.

[@edwardteal4984]

What if you owned the property 12 years in total and lived in at 10 years as your primary residence?

[@TonyPuppets]

Was it a rental first? If you moved into it in 2009 or after as your principal residence (that is when the law changed), then you would not have to pay taxes on 10/12ths of the capital gains when you sell. You will, however, have to keep track of the amount of tax you saved when the home had depreciation during the 2 years it was rented (even if you didn't claim it). That will be taxed at regular income rate. I am not a tax person, just interested in the topic.

[@QueenYak]

If I hold the Primary Residence for a full 10 years, do I get to keep 100% of the gains on the original sale?

[@golddiggerboss]

No you can keep 80%

[@QueenYak]

@@golddiggerboss So 80% is the top end of the limit on what you can keep? Tx

[@jonnymeans]

@@QueenYak No, it's fractional and asymptotic. Every year you live in it reduces the percentage that's taxable, but it will never go zero. If you live there 8 out of 10 years, your taxable base is the inverse of that - 20%. 18 out of 20 years, it's 10%. 38/40 its 5%, etc...

[@QueenYak]

@@jonnymeans Thanks

[@mskeakitty]

I had to move and rent a home in a different state over 5 years ago. I am now selling what used to be my primary residence to buy a home in the state I now live in. I did rent out my house for a few months but let family stay for free the rest of the time. Since I don't own any other primary residence, can I purchase a primary residence in a 1031 exchange?

[@tinazhang4396]

👍👍👍👍👍

[@vinht__tango1551]

Is this still relevant in 2021?

[@mrdeyabu0077]

🙏🙏🙏

[@wyenkoan]

So not worth it to hold for 10 years =/

[@philatwan54]

This information is not completely correct because of the The Housing and Economic Recovery Act of 2008.

[@michaelmccafferty7341]

I was wondering about that too. Unless the 1031 makes it unique?

[@BW-kv9wj]

Democrats will change it so 100% is taxable.

[@QueenYak]

You said that elsewhere. Stop fear-mongering. You don't know what's going to happen.

[@BW-kv9wj]

@@QueenYak Obviously you’re a democrat. Am I correct?

[@QueenYak]

@@BW-kv9wj "Obviously"? Are you guessing again? Bad habit.

[@BW-kv9wj]

@@QueenYak So you’re a Republican?

[@QueenYak]

@@BW-kv9wj My party affiliation, or lack thereof, has nothing to do with your comment.