1031 Exchanges for Residential Properties
We are often asked if a 1031 exchange can be used for residential properties.
Yes, a 1031 exchange can be used for residential properties. A 1031 exchange, also known as a like-kind exchange, is a tax-deferred exchange of one investment property for another. To qualify for tax-deferred treatment, the properties being exchanged must be investment properties, rather than primary residences. This means that a 1031 exchange can be used to exchange a rental property for another rental property, or to exchange a vacation home that is being used as a rental property for another rental property. However, a 1031 exchange cannot be used to exchange a primary residence for another primary residence.
The follow-up question is often ‘can I live in a 1031 exchange residential property?’
Yes, you can live in a property that was acquired through a 1031 exchange, but doing so may have tax implications. When you sell a property that you have used as a primary residence and then purchase a new primary residence using the proceeds from the sale, you may be able to exclude some or all of the capital gains from the sale from your income for tax purposes, depending on your circumstances. This is known as the "primary residence exclusion."
However, if you use a 1031 exchange to acquire a new primary residence, you will not be able to use the primary residence exclusion to exclude the capital gains from the sale of your old primary residence from your income. This is because the primary residence exclusion is only available for the sale of a primary residence, not for the exchange of a primary residence for another property. Instead, the capital gains from the sale of your old primary residence will be deferred until you sell the property that you acquired through the 1031 exchange.
As always, you should consult with your tax advisor or 1031 specialist attorney for your specific situation.