Oftentimes taxpayers ask me: “Hey I don't qualify for the personal residence exclusion because I haven't lived in the property for two of the preceding five years, but I still want to defer the gains so can I do a 1031 exchange?”
The answer is no. In order to qualify for 1031 you must have held the property for investment or business purposes. The fact that you've lived in the property and are residing in the property is antithetical to holding it for investment or business purposes. If people don't qualify for the principal residence exclusion and they want the tax deferral they may want to structure their transaction so that they rent the property out for a few years to rehabilitate it as a business or investment property and then it can qualify for 1031.
For more information on what type of properties qualify (and don’t qualify) for 1031 exchanges, check out this article.
- 1031 Hotline: If you have questions about personal property exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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