The tax code has many provisions that are favorable to property owners. Section 1031 of the Internal Revenue Code is one of these, but can you use a 1031 exchange for a primary residence? Let’s see.
What Is A 1031 Exchange?
In order to avoid paying capital gains tax, investors can engage in a 1031 exchange, in which they sell one investment property and buy another.
Real estate brokers, title firms, investors, and many others frequently use the phrase “1031 exchange,” which is derived from Section 1031 of the Internal Revenue Code (IRC).
It has even become a verb, as in “Let’s 1031 that building for another.”
Can You Use A 1031 Exchange For A Primary Residence?
Since you live in the property and do not keep it for investment, the primary residence rarely qualifies for 1031 treatment.
If you refrain from living there and rent it out for an adequate amount of time, it is considered an investment property, which may make it suitable.
What Happens When You Sell A 1031 Exchange Property?
When you utilize a 1031 exchange, you are postponing the payment of your capital gains tax burden; you are not entirely eliminating it.
Therefore, if you sell a property that was gained through a 1031 exchange, you will be required to pay the capital gains tax that you had carried over from the first property.
How Long Do You Have To Hold A 1031 Exchange Property?
The IRS examines each 1031 exchange individually. The Internal Revenue Service has stated that a holding term of two years has been adequate to fulfill the qualified use case, even though there are no rules that specifically address a holding period for a 1031 exchange property.
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FAQs
Q: Can You Defer Capital Gains On Primary Residence?
The house sale exclusion is a considerable tax advantage provided by the IRS to those selling their primary residence. Investors can postpone the capital gains tax by “rolling over” the proceeds from the sale of one investment property into the purchase of another.
Q: Which Type Of Property Does Not Qualify For 1031 Exchange?
There are various different forms of property that do not qualify for a 1031 exchange. For Example:
- Inventory
- Property held for sale
- Stock in trade
- Certain partnership interests
- Minerals and timber rights
- Certain personal property.
