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1031 calculation?

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  • 1031 calculation?


    Would appreciate help with this question.  I have owned my primary residence for the past 5 years, with ~$250k in appreciation.  I'm considering renting it as an investment property.

    Let's assume I hold the house as a rental property for 5 additional years and then sell, with zero further appreciation during those 5 years (so $250k overall appreciation since I first bought the home).   Would this $250k price appreciation be exempt from capital gains tax (as in a primary residence), or fully taxed as capital gains as in an investment property?

    What would happen if I had an additional $250k appreciation during the 5 years of rental investment after the initial 5-years of living in the home (so overall $500k appreciation between purchase and sale)?  Is the first $250k "tax protected" since I lived in the home during the first 5 years, and I only pay capital gains on the following 5-years' $250k capital gains?  Or I pay taxes on the full $500k as if the home was an investment property for the entire time?

    Thank you very much,





  • #2
    First of all, a 1031 transaction is a like-kind exchange, as opposed to a sale. Are you also asking about an exchange?

    To answer your questions:

    Assuming the new tax proposals stand, I would presume that the initial $250k tax-free gain would remain tax-free under the 5 out of 8 year rule. Of course, you would have depreciation recapture from the period of rental.

    If you sold in the 1st 8 years, you would still get the $250k gain tax free and pay tax on the additional $250k gain, but not all at LTCG rates (the rates are graduated for real property).

    My dog is nipping at my pants to go out and I may have a typo!
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      Sorry!  You're correct, NOT a 1031 exchange question/issue.

      I'm not completely familiar with the 5 out of 8 year rule, it has to do with living in a home for 5 of 8 years to avoid capital gains tax?



      • #4
        Yes that is under the new proposal, to avoid $250k/spouse of LTCG tax. Same as the 2/5 year but stretched to 5/8. Really messed up some of our physician clients, but, remember, it's not final yet. At least I haven't had time to check the news today  
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


        • #5
          Wondering if they kept the extensions for the 5/8 rule for military, those forced to move for work, etc.  Used to be another ten years that got tacked on.