What if selling your home meant facing a $1 million tax bill? For one couple in Los Gatos, changing how they used the property opened up a different possibility. David Moore, CEO of Equity Advantage, recalls a transaction in which 1031 Exchange tax deferral helped the couple go from an estimated $1 million tax hit to no immediate tax bill. However, getting there was a bit of a feat, including converting their residence to investment property and exchanging it for a whopping 24 replacement properties.
How a Home Became Part of a 1031 Exchange
Around 20 years ago, one couple had a valuable home in Los Gatos worth roughly $4.5 million with approximately $3 million in gain on the property. They wanted to sell their home, but doing so would generate a $1 million tax bill.
The husband and wife (a lawyer and CPA) contacted their outside counsel, who in turn referred them to Equity Advantage to discuss what they could do about the substantial tax bill they faced.
The best solution? A 1031 Exchange that could help them defer those taxes. But first, they had to move out of their house and convert it to investment property. They couldn’t simply sell their personal residence and call it an Exchange because they were going to be buying investment properties with the money. They needed to change how they used the house first before selling it.
What 1031 Exchange Tax Deferral Made Possible
When they first thought about selling their house, the couple was looking at roughly $1 million in taxes. But by converting the house to investment property and completing an Exchange, they brought that immediate tax bill down to zero. The taxes were deferred, allowing them to keep that money invested in real estate.
And instead of exchanging into just one replacement property, they ended up buying a whopping 24 properties. The value they had built up in their Los Gatos home went toward a collection of real estate investments, something that might never have been possible had they sold their home as a personal property and paid the $1 million in taxes.
Completing 24 Purchases Inside 45 Days
Buying 24 properties is quite a bit to get done, and this couple was able to complete every purchase inside the 45-day identification period. The wife, who was a CPA, understood that one failed purchase could have blown up the Exchange as it was arranged. They had to do more than find properties they wanted to own; they needed to get those purchases closed.
This situation was pretty unique, and most investors will not likely find themselves facing quite so many properties at once. However, it is a fantastic example of what can be accomplished through a 1031 Exchange and dedicated planning.
Looking at Your Options Before Selling
When you’ve got a lot of gain on your home, it’s easy to look at the tax bill and figure that’s just the cost of selling. This couple was looking at roughly a million dollars in taxes. But by changing how they used the property before selling, they were able to pursue an Exchange and keep that money invested in real estate.
Making that work meant moving out and converting the house to investment property before the sale. This may or may not be the best fit for your situation, but it’s worth having the conversation while you still have those choices. Being willing to change how you use the property may open up options you hadn’t considered.
If you are considering selling a home with substantial gain, contact Equity Advantage to talk through whether converting it to investment property for a future Exchange could fit your plans.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
FAQs About 1031 Exchanges and Deferring Taxes
How did this couple use 1031 Exchange tax deferral?
They moved out of their Los Gatos home, converted it to investment property, and exchanged it for 24 replacement properties, deferring an estimated $1 million tax bill.
Did taking the tax bill to $0 mean the gain disappeared?
No. The Exchange deferred the taxes rather than permanently erasing the gain on the property.
Can you sell your primary residence and use the money for a 1031 Exchange?
Simply using the proceeds to buy investment property does not make the sale of a primary residence eligible for an Exchange. In this couple’s case, they first moved out and converted the home to investment property before selling.
