Among different questions on 1031 exchanges asked by investors, the most common one is how to do a 1031 exchange on a primary residence? Or is it even possible to do a 1031 exchange on a primary residence? As you may know, only investment properties qualify for a 1031 exchange, and your home can’t be an investment property for sure. That’s why it doesn’t qualify as a 1031 exchange property. In this article, I’ll try to explain the theory behind doing a 1031 exchange on primary residences and how you can do it as well.

Can I Do a 1031 Exchange On My Primary Residence?

One of the most common questions that we often come across. Maybe not everyone, but certainly some can. But can you? If you ask IRS, you’ll get a direct No. However, as it happens under the Internal Revenue Code, there are exceptions.

Let’s consider a situation: what if after some time you choose to convert your primary residence into a rental property? Here’s the answer. If you turn your primary home into a rental property (i.e., you rent it to tenants who get the possession, and you no longer use the property as your primary residence), you may be able to do a 1031 exchange on that property.

Although the IRS doesn’t clearly state how long you must hold the property for rental purposes, the majority of tax professionals believe that one to two years should be enough, given you can show the property is used for investment purposes.

The IRS has clear views on the following two points:

  • Just declaring your house is a rental property doesn’t prove it is.
  • You can’t live in your house if it’s a rental property, and you must rent it out for real for some time.

It’s done. Now, you’ve proved that your property is not your residence. That said, you can do a 1031 exchange on your property and defer all capital gain taxes. Certainly, you may not be able to do a 1031 exchange on your primary residence. However, if you convert your primary residence into a rental property and hold onto it for some time, you are good to go for a 1031 exchange.

Have you ever thought about co-owning a large investment property?

Undoubtedly, individual real estate investments are the most profitable ones. But, it also requires huge capital. The best thing with 1031 exchanges is that you can invest in a co-ownership structure and still complete your 1031 exchange. For example, if the value of the property you sold is less than the value of the property you want to acquire, you must find a middle way. In such a situation, shared ownership can help you complete your 1031 exchange. A TIC or Tenancy-In-Common investment could be an ideal option. In a TIC, up to 35 investors co-own a big property and receive a definite share of income from the revenue generated by the property. As it’s a real estate investment, TICs qualify for a 1031 exchange. To have an in-depth knowledge of TICs, you can speak to TIC investment professionals.

 

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