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Scenario

  • I bought a primary residence in Utah on 06/2020
  • RE in UT boomed (21% for my residence) and I'd like to sell

Additionally

  • I have property I've owned since 2007 I'd like to sell while the market is high
  • I lived there 2007-2012 but only 6mo out of the last 5 years

From what I've learned:

  • I COULD be exempt of 250k as a 'single' but I made > 40k last year and I don't meet 2/5yrs on either property this seems non-applicable
  • A 1031 on multiple properties sounds difficult AT BEST

The proceeds on total sales would be ~250k. I'm trying to move quickly as this RE bubble will not last.

Question

What is my best option to minimize taxation on the sales? It seems like my best choice is to live in my current home until the 2 year mark and do a 1031 on the other.

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    If the goal is to exit a hot RE market, have you identified a cold RE market to exchange into? If not, a 1031 exchange will not allow you to 'exit' - you'll still own real estate.
    – Orange Coast- reinstate Monica
    May 30, 2021 at 1:11
  • @OrangeCoast-reinstateMonica are you referring to the 45 & 180 day rules or something else? To answer your question, I have some options lined up but nothing I'm ready to move forward on today.
    – Jacksonkr
    May 30, 2021 at 2:51
  • 1031 is RE to RE, as you know. I'm saying that that contradicts your desire to exit "as this RE bubble will not last." You'll still be in RE.
    – Orange Coast- reinstate Monica
    May 30, 2021 at 11:40

1 Answer 1

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You have a couple of issues with your plan of using a 1031 exchange.

I have property I've owned since 2007 I'd like to sell while the market is high

We have to assume that this is rental property, otherwise the use of the 1031 exchange would not be allowed.

The end result of the 1031 exchange is to not have money that can be taxed at this time. That means that you would still have equity locked into the new property. And some point you will sell the new rental property and owe taxes on that sale.

The proceeds on total sales would be ~250k. I'm trying to move quickly as this RE bubble will not last.

One way this could work would be to get an investment property or properties that hasn't seen the bubble yet, but can be expected to grow over the next decade. So finding a place where the market for those new properties will grow due to changes expected in those communities.

Otherwise if you were to sell the rental property, and then buy the house next door as part of the 1031 exchange you will still be invested in a bubble. Nothing would have changed.

What is my best option to minimize taxation on the sales? It seems like my best choice is to live in my current home until the 2 year mark and do a 1031 on the other.

You will have to decide. It can depend on the numbers and what you could do with the cash.

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  • Yes, I'm hoping to exit the hot market and enter a cold market somewhere else in the US. As pointed out before I have yet to "identify" a cold market. I'm looking at CA but I'm not sure how "cooled off" it is. NY is a close second but it sounds like I'm staying put for now. Thanks for the answer!
    – Jacksonkr
    Jun 2, 2021 at 14:18

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