One of the biggest questions we get is: “can I use my primary residence in a 1031 tax-deferred exchange?” Well, maybe not everyone, but certainly some. But, can you? The IRS’ short answer is a stern no. However, as is usually the case under the Internal Revenue Code, there are exceptions.
Consider this scenario: what if you decide to turn your primary residence into a rental property? Now we’re getting somewhere. If you convert your primary residence into a rental property (i.e., you are in fact renting it to tenants who have possession, and you no longer personally occupy the property) you may use it in a 1031 exchange.
Although the tax code doesn’t state exactly how long you must hold the property for rental purposes, most tax professionals agree that one to two years is long enough, provided you can demonstrate the property is used for business or investment purposes.
The IRS is clear on two points:
Merely declaring your house is a rental property isn’t enough.
You can’t live in your house at all while it’s a rental property and you must actually rent it out for some period of time.
All right, so you’ve established that your property is no longer your primary residence, but a rental property. Now you can do a 1031 exchange and defer all of the capital gains from a sale of that residence property. Because remember, when done correctly, a 1031 exchange allows you to defer 100 percent of the capital gains taxes on the sale of real estate. (To learn how a 1031 exchange works click here.)
And now you know: your primary residence may not be used in an exchange—but if you make it your former residence and hold onto it as an investment, you are free to proceed with one. So while rules (especially those created by the IRS) are not meant to be broken, spotlighting the exceptions can make a big difference for your investment portfolio.
If you are considering a 1031 exchange, contact us to discuss your questions, concerns, and needs. Realized would love to dramatically reduce the risk, time, costs, and complexity of completing your exchange.
Realized1031.com is a website operated by Realized Technologies, LLC, a wholly owned subsidiary of Realized Holdings, Inc. (“Realized”). Equity securities offered on this website are offered exclusively through Thornhill Securities, Inc., a registered broker/dealer and member of FINRA/SIPC("Thornhill"). Investment advisory services are offered through Thornhill Securities, Inc. a registered investment adviser. Realized Holdings, Inc. has a minority ownership interest in Thornhill Securities, Inc. Check the background of this firm on FINRA's BrokerCheck.
Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.
Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested.
This site is published for residents of the United States who are accredited investors only. Registered Representatives and Investment Advisor Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every representative listed. For additional information, please contact 877-797-1031 or email@example.com.