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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 14479
Experience:  15years with H & R Block. Divisional leader, Instructor
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This question: We have a rental property with over $20,000

Customer Question

This question:
We have a rental property with over $20,000 accumulated in passive activity losses. My husband and I are separating and we need to decide between converting the rental property back into a primary residence for myself, or selling it and using the profit to purchase another home for myself.

I understand that if we sell the property the passive activity losses can then directly reduce our income for taxes this year. I am also of the understanding that by using the revenue from the sale to purchase another home, it is considered a like-kind exchange and we then won't have to pay taxes on the gains from equity in that rental property.

We need answers to two questions to help us decide.
1. If we convert it back into a primary residence, do we then lose the passive activity loss or does it just continue carrying forward?

2. If we sell it and use the revenue to significantly pay down a mortgage on another property we already own, is that considered a like-kind exchange?

In the state of AZ.

Any guidance is appreciated.
Submitted: 3 years ago.
Category: Tax
Expert:  Robin D. replied 3 years ago.

Robin D :

Hello and thank you for using Just Answer,
If we convert it back into a primary residence, do we then lose the passive activity loss or does it just continue carrying forward?
No, the loss can be used when sold
If we sell it and use the revenue to significantly pay down a mortgage on another property we already own, is that considered a like-kind exchange?
No, a like kind exchange would not be satisfied under this type of arrangement. Both the relinquished property and replacement property must be held for productive use in a trade or business or for investment. Property acquired for immediate resale will not qualify. The taxpayer's personal residence will not qualify. The relinquished property must be exchanged for other property, rather than sold for cash and using the proceeds to buy the replacement property. Most deferred exchanges are facilitated by Qualified Intermediaries, who assist the taxpayer in meeting the requirements of Section 1031. The replacement property may not already be held by the taxpayer.