Would you like to convert a 1031 Exchange into a Primary Residence?
Discover the tax advantages of a 1031 exchange and how you can potentially turn your newly acquired property into your primary home. Learn the key differences between a primary residence and a rental property in the context of a 1031 exchange, and get a grasp of the basic rules, regulations, and timelines associated with executing a 1031 exchange for your primary residence. Our article also provides a clear example to enhance your understanding.
In a 1031 exchange, when acquiring a replacement property, it should initially serve as a rental or business property. If you wish to benefit from Section 121 tax advantages, you must wait at least two years before making a $350,000 single-family home your primary residence, and you must own the property for a minimum of five years before selling it.
Let’s consider the case of Samantha: She acquired a $350,000 rental property through a 1031 exchange and rented it out for nearly three years to establish it as an investment or business property. Afterward, Samantha moved into the property and made it her main residence for over two years, thus making it eligible for Section 121 benefits.
However, it’s important to note that if Samantha sells the property for a profit in a 1031 exchange, she will have tax obligations related to her previous property. The exact amount of tax owed depends on various factors like depreciation, capital gains, basis, and the carryover amount from the relinquished property.
Keep in mind that the IRS places great importance on the “intent” behind the initial purchase of the property. The property should be viewed as an investment opportunity rather than a primary dwelling. To demonstrate this investment intent, avoid actions like creating plans for a primary residence, temporarily moving into the property, including a contingency that requires the sale of your primary residence, or initiating immediate construction on the 1031 exchange property intended for use as a primary residence. Documenting efforts to rent out the house for at least a year before moving in can also help establish investment intent.
The IRS provides a safe-harbor provision that necessitates owning the property for a minimum of 24 months following the 1031 exchange to determine whether it was purchased with the intent of being used as an investment or business property before becoming a primary residence. For more details on this, you can refer to this resource.
If you’re contemplating residing in a property obtained through a 1031 exchange, it is advisable to consult with an accountant and a qualified intermediary to navigate potential tax complications. When executed correctly, a 1031 exchange into a primary residence can result in substantial tax savings, making it a highly advantageous opportunity for real estate investors. For further information, seek advice from reliable sources.
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