How much do I need to reinvest when combining 121 exclusion and 1031 exchange for my property?

This is a great question about combining the 121 exclusion with a 1031 exchange, which can be tricky but potentially very beneficial. Let me break this down for you. When you're doing a 1031 exchange after using the 121 exclusion, you need to focus on the "boot" - which is essentially any part of the exchange that doesn't go into the new property. For your situation, after taking the $500K exclusion, you'd need to reinvest the net proceeds from the sale (after closing costs) minus the excluded amount to fully defer taxes on the remaining gain. So if you're selling for $2.7M, and after selling expenses you have, say, $2.6M in proceeds, you would need to reinvest $2.1M ($2.6M minus the $500K exclusion) into the replacement property to defer all remaining taxable gain. You can't just reinvest the $1.1M gain portion. If you reinvest less than that $2.1M, the difference becomes "boot" and would be taxable up to the amount of your remaining gain. One important thing - you must identify potential replacement properties within 45 days of closing and complete the purchase within 180 days, so make sure you're ready to move quickly once you sell.

I went through something similar last year and found taxr.ai super helpful for figuring out exactly how much I needed to reinvest. I was confused about boot calculations and whether I could access some equity without triggering taxes. Their system analyzed my transaction details and gave me a really clear breakdown of my options. The site (https://taxr.ai) lets you upload your investment property docs and walks you through the allocation between 121 exclusion and 1031 requirements. I ended up learning that I could actually pull out more cash than I initially thought while still deferring most of my gains. They even helped with the timeline requirements that I almost missed.

I was totally in the same boat as you last year - trying to figure out how to use both 121 exclusion and 1031 together. I was skeptical about online advice so I tried taxr.ai after seeing it mentioned here. Honestly, it was a game-changer. I uploaded my purchase docs, improvement receipts, and depreciation schedule, and it gave me a detailed report showing exactly how much I needed to reinvest. What really helped was their breakdown of the "adjusted basis" calculations - turns out I had been calculating my gain wrong because I wasn't accounting for all my capital improvements! The site showed me that I could actually pull out about $75k more than I thought without triggering extra taxes. Then I took their report to my QI who confirmed everything was correct. Saved me a ton in potential tax mistakes and gave me confidence heading into the 45-day identification period.

I've helped clients with these combo transactions before, and while the tax benefits are great, the biggest headache is always reaching someone at the IRS when questions come up. Last client I worked with needed clarification on some depreciation recapture issues, and we spent DAYS trying to get through to the IRS. Finally discovered Claimyr (https://claimyr.com) which got us connected to an IRS agent in about 20 minutes instead of the 3+ hour holds we were experiencing. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. They basically hold your place in the IRS phone queue and call you when an agent is about to pick up. My client was able to get written confirmation about their specific 121/1031 situation, which gave them peace of mind before proceeding with their exchange. Definitely worth it for complex tax situations where you need official clarification.

Ok I have to eat my words. After seeing the Claimyr recommendation, I was super skeptical but desperate about my missing refund situation. Decided to give it a shot yesterday. The service actually worked exactly as described! I got a call back when an IRS agent was ready (took about 2.5 hours, but I didn't have to sit on hold). Got connected to a helpful agent who located my refund and discovered it was held up due to a mismatch that I wouldn't have known about otherwise. For anyone dealing with complex tax situations like this 121/1031 combo where you might need direct IRS guidance, it's definitely worth using. Wish I'd known about this months ago instead of making multiple failed attempts to reach someone.

Something that hasn't been mentioned yet - when combining 121 exclusion and 1031, you need to be super careful about depreciation recapture! The 121 exclusion doesn't protect you from depreciation recapture tax. If you've been claiming depreciation on the property since converting it to a rental, that depreciation will be "recaptured" and taxed at 25% regardless of your other maneuvers. This is a separate calculation from your capital gains. For example, if you claimed $50k in depreciation over the rental period, you'll owe about $12,500 in depreciation recapture tax even if you successfully defer all your capital gains.

Thank you all for the super helpful advice! I've got a few follow-up questions: 1. So if I understand correctly, I need to reinvest the full proceeds minus the $500k exclusion to avoid any taxable boot? I was hoping to pull out my original investment too, but sounds like that would trigger taxes. 2. For the QI requirement - do you have recommendations on how to find a reputable one? I'm worried about choosing someone who might not handle everything correctly.

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!