Tax Concepts For Primary Residences
Joyce and Reid are seniors who live in a 2 story home in Mililani and are concerned about the rising cost of senior housing.
The couple has been reading about the demand for senior-friendly housing, and hearing that there are over 10,000 people that turn 65 everyday in the US. After a review of their finances and assets, they decide to make some changes to their real estate portfolio.
Knowing that the increase in the number of seniors is even higher on Oahu, Joyce and Reid decide they would like to own investments that cater to the needs of this growing group.
The couple opted to sell their townhome in Waipio Gentry and exchange it for a single-level property in town that is centrally located, near bus lines and hospitals and that incorporates universal design features, especially in their kitchen and bathrooms. Ideally, with today’s high demand for senior living, the property could command higher rent and should be easier to obtain a tenant.
Additionally, many senior living communities are experiencing waitlists. In an effort to plan ahead, if Joyce and Reid are unable to obtain suitable housing for themselves, they could one day opt to move into their investment property. This could also enable them to qualify for significant tax savings.
Tax Concepts for 1031 Exchanges
Joyce & Reid could redeclare their investment as a primary residence and absorb a large amount of capital gains taxes that were once considered deferred gains.
By owning their investment property for 5 years while residing in it for at least two years, their investment would now receive all the benefits of a primary residence.
The capital gains exclusion on the sale of a primary residence creates an appealing tax planning opportunity. It allows an owner to exclude up to $250,000 of capital gains per person. Therefore, the cumulative gains for Joyce and Reid can be sheltered for up to $500,000 (for a married couple filing jointly) under section 121 of the IRS code.
This situation was simplified and is just one of many options available when utilizing a 1031 Exchange, as it can be a very useful tool especially for seniors.
There are exceptions, and each individual’s situation may vary. It is highly recommended that you consult with a tax professional prior to making any decisions.