Recently, one of the most common questions I have been getting from clients who are anticipating a significant capital gains when they sell is “can I use my primary residence in a 1031 tax-deferred exchange?”
The short answer from the IRS is a flat no, only “investment properties” qualify for a 1031 exchange. However, as is the case with most of our tax code, there are absolutely exceptions!
What if you turned your home into an investment property?
Well, assuming you in fact move out and rent your home to tenants who have possession of the property, then your property would qualify for a 1031 exchange.
How long do need to rent your home out?
While the IRS does not specify how long a property must be rented before it is exchanged, most tax professionals agree that 12 to 24 months is sufficient. Once you have established that your property is no longer your primary residence, but a rental property, you may then proceed with a 1031 exchange.
While IRS rules should never be broken, If executed appropriately, converting your home to an investment property is totally acceptable. A 1031 exchange allows real estate owners to defer 100% of their capital gains tax when they sell and, when properly managed, can have a major impact on securing your financial future.
Every situation is different so you should absolutely involve your licensed tax professional when considering a 1031 exchange. If you would like to learn more about the 1031 process and how it might work for you, please do not hesitate to reach out.