Can a principal residence be exchanged in order to qualify for Section 1031? We answer that question and more in this article.
Investment or Business Purposes
In a 1031 exchange, the property must have been held for investment or business purposes. Most principal residences are not held for investment or business purposes. They’re held for the antithetical or completely opposite purpose of being your residence. 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.
A Farm Example
But what do you do with a property such as a farm where you got the little farm house situated on 900 acres of tillable ground?
You’ve got one closing for the principal residence on which you take the exclusion under section 121 for the home and then for the rest of the farm (the tillable acreage) it's used for investment or business purposes on that portion of the sale you do a 1031 exchange to get the best result for both situations.
This situation also arises with part-owner occupied duplexes where you can use both section 121 for principal residence exclusion on the home portion and section 1031 on the rental portion. We once had a 1031 exchange involving a funeral parlor business with the owner’s personal residence on the second floor of the building.
- 1031 Hotline: If you have questions about 1031 exchanges of principal residences, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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