Recently, a client came to us with the following 1031 scenario. The client was looking to sell their personal current residence and 1031 into something different. They had only lived in the residence for 15 months and didn't plan to live in the replacement property. Is it possible to exchange this property in a 1031 transaction. If so, what are the implications?
Personal Residence Exclusion
Unfortunately, this situation does not qualify for 1031 exchange treatment. A personal residence may not qualify for section 1031 as it has not been used for investment for business purposes. However, there is another tax code section (section 121) that allows for an exclusion of up to $500,000 of gain if you're married or $250,000 if you’re single. That being said, you must have owned and use the property as your primary residence for at least two years.
Partial 121 Exclusion
Interestingly, there are certain exceptions that will permit a partial 121 exclusion in instances where the taxpayer moves for reasons that are beyond their control such as their employer transfers them to a different town.
Things can get very tricky when it comes to section 1031, 121 and the personal residence exclusion. It’s always best to speak with a tax 1031 tax professional about your situation to cover all of your bases.
- 1031 Hotline: If you have questions about section 121 and the personal residence exclusion, feel free to call me at 612-643-1031.
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