Tax Strategy: How a 1031 Exchange Works with the $250k Primary Residence Exclusion - Multiple Questions

I've handled several similar situations with my clients. Let me break this down for you: 1. The $250k exclusion works differently with 1031 properties. If you 1031 exchange your rental and then convert it to your primary residence, the exclusion only applies to appreciation that occurs AFTER you convert it. The $250k gain from the original property would still be taxable when you sell. You'd get exclusion on the $70k that occurred during your ownership as a primary residence. 2. Yes, you can absolutely refinance from an investor loan to an owner-occupied loan once you move in. Lenders typically require you to live there, which you would be doing. 3. The IRS doesn't care about your loan amount in a 1031, only that you reinvest all the proceeds from the sale. If you sell for $880k and buy for $800k, you'd pay tax on the $80k "boot" regardless of loan amount. 4. For 1031 purposes, the selling costs reduce your realized gain. So it's the net amount after fees that matters. 5. If you buy cheaper, the difference is called "boot" and is taxable. In your example, if you sell for $880k (net $815k after selling costs) but buy for $800k, you'd have $15k of taxable boot. 6. Yes, if you moved into one unit of a 4-unit building for 2 years, you could exclude 25% of the gain under the primary residence exclusion (assuming square footage is equal among units). This strategy can work, but timing is critical and the rules are complex. Consider your long-term goals carefully.

Hey! I was in a similar situation last year and discovered this amazing tool that helped me work through all the complexities of my 1031 exchange and primary residence exclusion questions. It's called taxr.ai (https://taxr.ai) and it basically analyzed all my real estate documents and gave me a detailed tax strategy roadmap. I was surprised at how it caught things I hadn't considered, like the exact timing requirements for converting the property and the specific documentation I needed to keep. It even showed me how to properly allocate the basis between land and improvements for the new property, which my regular accountant hadn't mentioned. The nice thing is you can upload your property docs and get a clear explanation of exactly how the 1031 deferral would work in your specific case, including calculating potential boot and depreciation recapture amounts. Saved me a ton of money compared to what I would have paid in taxes without knowing these strategies!

Just wanted to update everyone after trying out taxr.ai like the other commenter suggested. I was skeptical at first but decided to give it a shot with my complicated real estate situation. Honestly, it was exactly what I needed. I uploaded my closing documents from my previous property sales and purchase agreements for the properties I was considering. The analysis broke down exactly how much of my gain would be taxable in each scenario and when I could apply the primary residence exclusion. It even pointed out that I could allocate more of my basis to the building vs land to increase my depreciation deductions while I'm still renting it. What really surprised me was finding out that I had been calculating my depreciation wrong on my previous returns, which could have triggered an audit. Now I'm going to file an amended return to fix it before it becomes an issue. Definitely worth checking out if you're dealing with real estate tax questions.

If anyone's struggling to get actual help from the IRS on 1031 exchange questions (like I was), I found a service called Claimyr (https://claimyr.com) that actually got me through to an IRS agent in less than 15 minutes. There's a demo video here: https://youtu.be/_kiP6q8DX5c that shows how it works. I was getting conflicting advice about my situation with rental property conversions, and I spent WEEKS trying to get through to the IRS directly with no luck. Claimyr basically calls the IRS for you, navigates all the phone prompts, waits on hold, and then calls you when there's an actual human on the line. The IRS agent I spoke with confirmed that I needed to file Form 8824 with my tax return for the year of the exchange, and he clarified exactly how to report both the 1031 exchange and later primary residence conversion correctly. Saved me from potentially making a $40k+ tax mistake.

I need to publicly eat my words here. After posting my skeptical comment yesterday, I was still desperate for answers about my 1031 situation, so I decided to try Claimyr as a last resort. I figured if it was a scam, I'd just dispute the charge. Well, I'm shocked to report that it actually worked exactly as described. I put in my request around 9am, they handled all the calling and waiting, and about 40 minutes later my phone rang with an IRS agent on the line. They stayed on just long enough to make sure we were connected, then dropped off. The agent confirmed something important for my situation - that my planned 1031 exchange would be disqualified if I moved into the replacement property too soon, and I need documentation proving it was held for investment intent. She recommended holding it as a rental for at least 2 full tax years to be safe. For anyone struggling with 1031 questions, getting definitive answers directly from the IRS was worth every penny. I would have made a huge mistake without this information.

Quick question about the depreciation recapture part - when you sell the final property after living in it for 2 years, aren't you gonna get hit with a HUGE depreciation recapture bill? My accountant told me the 25% depreciation recapture applies regardless of the 121 exclusion, so you'll still owe that even if you can exclude some of the gain. Am I understanding that right?

Has anyone here actually completed a 1031 exchange into a property that you later converted to your primary? I'm considering this exact strategy and wondering about the practical aspects. Like how picky is the IRS about proving investment intent for the 2 years? Do you need to show specific rental income or just that you didn't live there?

This is a really complex strategy with multiple moving parts, and I think you need to be careful about some potential pitfalls that haven't been fully addressed yet. One thing that concerns me is the timing of your primary residence sale. If you sell your current home first and then do the 1031 exchange on the rental, you'll have a large amount of cash sitting around that could complicate your exchange timeline. The 45-day identification period and 180-day completion deadline are strict. Also, regarding your question about keeping cash by increasing the loan amount in the 1031 - while the IRS doesn't directly care about loan amounts, you still need to invest ALL of your net proceeds from the sale. If you sell for $815k net and only buy a property for $800k, that $15k difference becomes taxable "boot" regardless of how you finance the purchase. For the multi-family conversion idea (question #6), that's actually a much simpler path tax-wise. Converting 25% of a 4-unit to primary residence use would let you exclude 25% of the gain, and you avoid all the 1031 complications entirely. You'd still have depreciation recapture on the rental portion, but the math might work out better overall. Have you run the numbers on just doing a straight sale of the rental and paying the capital gains tax? Sometimes the simplest approach is the most cost-effective when you factor in all the transaction costs and potential tax traps.

Just want to add another consideration that might help with your decision-making process - the market timing aspect. Real estate markets can be unpredictable, and your strategy assumes property values will continue appreciating over the next 4+ years (2 years rental + 2 years primary residence). If you're already "over being a landlord," that's actually a pretty strong signal that the multi-family conversion approach might be your best bet. Moving into one unit of your 4-unit property gives you immediate relief from full landlord duties while still maintaining some rental income from the other units. You'd get the 25% capital gains exclusion when you eventually sell, and you avoid all the 1031 exchange risks and timelines. Also consider that interest rates and lending requirements for investment properties have gotten much stricter recently. The refinancing from investor to owner-occupied loan (your question #2) might not be as straightforward as it was a few years ago, depending on your income and the property's debt-to-income ratio. One more thing - if you do decide to go the 1031 route, make sure you have your qualified intermediary lined up BEFORE you list your rental property. You can't change your mind and decide to do a 1031 after the sale process has already started. The exchange has to be planned from the beginning.

This is a fascinating thread with lots of great insights! As someone who's been following real estate tax strategies closely, I wanted to add a few thoughts that might help with your decision. One thing I haven't seen mentioned yet is the potential impact of state taxes on your strategy. Depending on what state you're in, the state capital gains tax rate could significantly affect your calculations. Some states have no capital gains tax, while others treat it as ordinary income. This could tip the scales toward or away from the 1031 exchange approach. Also, regarding your question about the $250k exclusion with multiple properties - there's actually a "once every two years" rule that applies to the Section 121 exclusion. If you sell your current primary residence using the exclusion, you won't be eligible to use it again for another 2 years. This could affect the timing of your overall strategy if you're planning to sell both properties within a short timeframe. The depreciation recapture issue that others mentioned is really significant here. With $125k already taken plus whatever additional depreciation you'd claim during the rental period, you're looking at a substantial 25% hit that can't be avoided with the primary residence exclusion. Given all the complexity and potential pitfalls, I'm leaning toward agreeing with the folks suggesting the multi-family conversion approach. It's cleaner, more straightforward, and gets you out of the landlord business faster while still providing meaningful tax benefits. Have you considered consulting with a tax professional who specializes in real estate to run the actual numbers on all these scenarios? The devil is really in the details with these strategies.

I've been following this discussion with great interest as I'm dealing with a similar situation. One aspect that hasn't been fully explored is the impact of the Tax Cuts and Jobs Act (TCJA) on these strategies, particularly the changes to like-kind exchange rules and the potential for future tax law changes. Under current law, 1031 exchanges are still available for real estate, but there's always political discussion about limiting or eliminating them. If you're planning a multi-year strategy, you're taking on legislative risk that the rules could change before you complete your plan. Also, I wanted to mention something about the qualified intermediary selection process. Not all QIs are created equal, and you want one with strong financials and proper segregation of client funds. There have been cases where QIs have gone bankrupt or misappropriated funds, leaving investors unable to complete their exchanges. Make sure any QI you choose is bonded and has a solid track record. For what it's worth, I recently decided against a similar 1031 strategy and instead took the tax hit upfront. The certainty of knowing my exact tax liability and being able to move on with my life was worth more to me than the potential savings from a complex multi-year plan with multiple moving parts. The multi-family conversion approach really does seem like your best option here. You get immediate relief from landlord duties, maintain some rental income, and achieve meaningful tax benefits without the complexity and risks of a 1031 exchange. Sometimes the best tax strategy is the one that lets you sleep well at night while still achieving your financial goals.