Just want to add - I did a similar transaction last year and the timing requirements of the 1031 exchange are no joke! The 45 days to identify potential replacement properties flies by, especially in today's market where good investment properties get snapped up quickly. My advice: start looking for replacement properties BEFORE you close on your sale. You can't officially identify them until after closing, but having a shortlist ready will save you a lot of stress during those 45 days. Also, work with a real estate agent who understands investment properties and 1031 exchanges. I wasted precious time explaining the requirements to an agent who kept showing me properties that wouldn't work for my exchange.

One thing I haven't seen mentioned yet is the importance of getting proper tax advice on the state level too. While federal rules allow the combination of 121 exclusion and 1031 exchange, some states have different rules or don't recognize one or both of these benefits. For example, in some states you might face state capital gains tax even if you successfully defer federal taxes through the 1031 exchange. And the timing of when you need to file state forms might be different from federal requirements. I learned this the hard way when I did a similar transaction - ended up owing unexpected state taxes even though my federal situation was handled correctly. Make sure to check with a tax professional who knows your state's specific rules, especially if you're buying replacement property in a different state than where you're selling. Also, don't forget about the potential impact on your state tax residency status if you're moving to a different state as part of this transaction!

Consider using the 3-property rule for your 1031 identification. You can identify up to 3 potential replacement properties regardless of their fair market value. This would let you name your neighbor's property plus 2 backup options in case they don't sell in time. Gives you some flexibility while still targeting the property you really want.

I tried doing something similar last year and it didn't work out. My neighbor changed their mind about selling and I had to scramble to find another property within the 180 days. Ended up buying something I wasn't that excited about just to complete the exchange. Make sure you have solid backup options!

Something important that hasn't been mentioned yet - if you're planning to refinance before a 1031 exchange, be aware that your debt replacement requirements might be affected. When you do a 1031, you generally need to replace the debt on your relinquished property with at least the same amount of debt on your replacement property (or add more cash to balance it out). If you cash-out refi before selling, you're increasing the debt on the relinquished property, which means you'll need more debt on the replacement property to satisfy the exchange requirements.

Has anyone used a DST (Delaware Statutory Trust) as their replacement property after doing a cash-out refinance on their relinquished property? I'm considering this because DSTs typically come with existing financing that might help satisfy the debt replacement requirements mentioned above.

Has anyone mentioned the tax implications if the OP decides to quit freelancing after just this one project? I had something similar happen - claimed startup expenses for a business that I ended up abandoning after just one client. The IRS sent me a letter questioning the business loss because I didn't continue the business in subsequent years. Had to provide documentation proving I genuinely intended to continue the business when I made those investments.

Great discussion everyone! Just wanted to add a practical tip for anyone in this situation - make sure you're crystal clear about which expenses are truly business startup costs vs. personal purchases. For example, if you bought a laptop that you use 80% for business and 20% for personal use, you can only deduct the business portion. Same with software subscriptions - if you're using Adobe Creative Suite for freelance work but also personal projects, you'll need to calculate the business use percentage. Also, keep detailed records of your business intent from day one. I always recommend new freelancers create a simple business plan (even just a one-page document) outlining their services, target market, and profit goals. This documentation becomes invaluable if the IRS ever questions whether your activity is a legitimate business vs. a hobby, especially when you're showing losses in the first year. The laptop and software expenses you mentioned should definitely qualify, but make sure you can demonstrate they were purchased specifically for your freelance business activities.

Has anyone checked the IRS "Where's My Refund" tool? Sometimes that will show pending payments even before they fully process. Go to irs.gov and click on "Get Your Refund Status" - you'll need your SSN, filing status, and exact refund amount, but it might show what this payment is for.

I'm active duty as well and had a similar situation last year. Turned out to be a correction from when I had to file an amended return due to military spouse residency issues - the IRS processed it way later than expected. One thing to check: if you used the military's free tax software (MilTax) or got help from the base tax center, they sometimes file amendments automatically if they catch errors. You might not even realize an amended return was submitted on your behalf. Also, TREAS 310 payments specifically from "MCFT" usually indicate it's a Treasury-processed payment rather than a regular IRS refund. Could be related to a Treasury offset program credit or even unclaimed military pay that was finally processed. The January 15th timing is actually pretty standard for when the Treasury starts releasing accumulated adjustments from the previous year. Once it posts, definitely check your military pay statements on myPay to see if there are any notes about tax corrections or back pay.