1031 Exchange of a House You've Lived in for Less than 2 Years

principal residence exclusion 1031

Recently I spoke to a client who was selling their house that they had lived in for less than 2 years. They had about $100,000 in capital gains on the home after all expenses. This taxpayer wanted to consider a 1031 exchange and was wondering if it was possible.

Principal Residence Exclusion

1031 may not be an option in this case if the house has been used as the taxpayer's principal residence. For the IRC 1031 to qualify, you need to HOLD the replacement property for business or investment purposes.

It’s your home and generally speaking you can't do a 1031 on your home. That's usually not a big deal because under IRC section 121 the principal residence exclusion you get to take up to $500,000 of that profit tax return married filing a joint tax return or $250,000 for single filing.

Extenuating Circumstances

But what if you must move early (prior to the two year period) because of:

  • Job related circumstances?
  • Health reasons?
  • Or other unforeseen circumstances?

You may still be able to take a portion of the two year exclusion if any of the following apply.

§121(c)(2)  EXCLUSION FOR TAXPAYERS FAILING TO MEET CERTAIN REQUIREMENTS:

(2) Sales and exchanges to which subsection applies. This subsection shall apply to any sale or exchange if:

(A) subsection (a) would not (but for this subsection) apply to such sale or exchange by reason of--

(i) a failure to meet the ownership and use requirements of subsection (a), or

(ii) subsection (b)(3), and

(B) such sale or exchange is by reason of a change in place of employmenthealth, or, to the extent provided in regulations, unforeseen circumstances.

  • 1031 Hotline: If you have questions about 1031 exchange property, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

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