1031 Exchange

,

Can a Principal Residence be 1031 Exchanged?

,
1031 principal residence

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.

  • Start Your 1031 Exchange: 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.

 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Safe vs. Non Safe Harbor Exchanges

safe vs. non-safe harbor exchange

When the regulations came out for 1031 exchanges, just about everybody gravitated towards the safe harbor exchanges, which allow for a sale to occur to a third party and a purchase to occur within 180 days. The only real curve ball is that under the safe harbor you have to identify in writing your replacement property within 45 days.

Safe Harbor Exchanges

The regulations do not prohibit you from doing a non-safe harbor straight exchange. But in a non-safe harbor exchange it's much more difficult to get the stars into alignment because you don't have the benefit of the deferred exchange timeline. Typically, in a non-safe harbor exchange would have to be a direct swap where you sell your relinquished property to party A and you simultaneously receive your new replacement property from party A (the same party). It’s like the old fashioned horse swap, I'll give you my horse in exchange for you giving me your horse.

Non-Safe Harbor Exchanges

A non-safe harbor exchange does not require you to hire a qualified intermediary but does require that you do a simultaneous swap with the party that you are giving your relinquished property to. For that reason it’s much more difficult to do a non-safe harbor straight exchange and given that the fees and expenses for doing a deferred safe harbor exchange are so minimal most people avail themselves with the protections of the safe harbor even when they are doing a quick or simultaneous exchange because they want the certainty that the safe harbor protections provide.

  • Start Your 1031 Exchange: If you have questions about safe vs. non safe harbor exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

,

Whiteboard Video - Cashout Refinancing Before a 1031 Exchange

,

In this whiteboard animation video, we discuss the pros and cons of doing a cashout refinancing before a 1031 exchange.

  • Start Your 1031 Exchange: If you have questions about cashout refinancing before a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Deferring Tax with a Reverse 1031 Exchange

reverse 1031 exchange

In today's marketplace it's really easy to be a seller because it’s a hot seller's market. There's a lot of people competing for the same replacement properties particularly in certain segments of the market like multi-family apartments. Here's where a reverse exchange can help you solve the problem of how to align your relinquished property with your replacement property. 

How a Reverse Exchange can Help

Step one is do a reverse exchange, find the replacement property first since that's the harder task lock it up with a purchase agreement and if necessary you can close on it having your qualified intermediary form a new LLC and that LLC acts as a straw man purchaser and temporarily holds title to the replacement property for up to 180 days until you then later sell the relinquished property.

So the beautiful thing is once you've sold your relinquished property it's really easy to complete your exchange because your replacement property is waiting for you on the shelf and we just take that replacement property off the shelf and transfer it to you to complete the exchange.

The Problem

The problem is that it's hard to find replacement properties the opportunity is to use a reverse exchange to lock in a sure thing so that you know with certainty you have your replacement property waiting for you at the end of this process.

  • Start Your 1031 Exchange: If you have questions about reverse 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Defer the tax. MAXIMIZE your gain.

Is a 1031 Exchange Right for Me? →