1031 exchange questions -
I own a rental property
that I plan to 1031 exchange to another rental property at some point. Couple questions:
1. What is the "safe harbor" time period after which I can convert it to primary residence? What needs to happen during "safe harbor" period? By "safe hard" I mean that IRS
will still treat it as 1031 exchange, not an outright sale.
2. When it is time to sell the property
obtained from 1031 after it has been converted to the primary residence, I understand my deferred depreciation
capture on the previous rental property will now be realized and I understand the tax
treatment of capital gain
on the sale of the new property (gain attributed to the rental period must excluded from section 121 exemption). My question is what happens to the capital gain on the sale of the previous property and that was deferred?
A hypothetical example:
Current property: 250k basis, depreciation taken 40k, capital gain 50k.
Future property acquired through 1031: 350k basis, depreciation taken 20k, capital gain 80k.
When I sell the future 1031 property, I will need to pay depreciation recapture of 60k (40k on previous property, 20k on 1031 property), and I will have to exclude a portion of 80k from 121 exemption. But what happens to the 50k on the previous property?