Can You Use a 1031 Exchange for a Primary Residence?
July 16, 2019There are several provisions in the tax code that can benefit real estate owners. One of these is IRC Section 1031, which allows for tax deferral on the sale of any property used in business or any property being held for investment when the property is exchanged for another property property to be used in the same way. Section 1031 only provides tax deferral because the original investment is carried over into the replacement property and capital gain taxes are owed when the replacement property is later sold. The 1031 Exchange can be a great benefit for those in real estate, but can you use a 1031 Exchange for a primary residence?
Benefits of a 1031 ExchangeLet's first take a look at the benefits of a 1031 Exchange. The first, of course, is deferred taxes, as long as the taxpayer receives no money from the sale of the property. The taxpayer must engage a qualified intermediary (QI) prior to closing to ensure the structure of the sale is a valid 1031 Exchange. A standard 1031 Exchange lets investors defer capital gains taxes on the sale of their property, which means a huge savings in tax dollars for the investor. It also makes it easier for investors to upgrade to larger, more profitable properties, so it is a great way to expand without paying out a lot of money. This is a key investment strategy that can help diversify your portfolio with different types of property, and it is also a very effective way to find investment properties that are easier to manage or that perform better than properties you have in your portfolio.
Can You Use a 1031 Exchange for a Primary Residence?The IRS normally doesn't allow for the use of a 1031 Exchange because it isn't commercial property. There is a way to use a 1031 Exchange for a primary residence under certain conditions using a special exclusion under Section 121 of the code, which basically states that a "personal residence can be exempt from capital gains tax through a 1031 exchange if the investor has owned the property in question for at least five years and has lived in it for two of those five years. The concept can be complex, so consulting experts in how these codes can be applied is essential.
If you intend to use a 1031 Exchange on a primary residence, you're going to need to institute a little strategy. Your primary residence must have been used as a rental property for two years before you make the decision to sell it, and you also must be able to demonstrate that you are no longer living in the property. This also means proving that the property is no longer being used as a primary residence and that it is being used as a business property. You cannot still be occupying the property as a personal or private residence in order to take advantage of the 1031 tax exchange.
One important point to emphasize is that you must be able to show the IRS that you rented out the property at market rate, and actively prove that you lived elsewhere.
In Florida, Key Title & Escrow are the experts. Under the Florida 1031 exchange law, owners of real estate held for investment or used in a trade or business in Florida can exchange property tax-free for "like-kind" real estate. Qualifying "like kind" real estate includes apartments, rental houses, retail properties and office buildings, and other types of real estate used for commercial purposes. The Florida 1031 exchanges are made for investors who would like to keep investing in real estate without paying high taxes associated with the sale of the property. If you're buying or selling real estate in Florida, Key Title & Escrow can help walk you through the process of how the Florida 1031 tax exchange works. You can call us today at (800) 547-0006 for a consultation with a trained Florida capital gains law real estate experts and learn how to leverage this tax break to help you continue to invest successfully in real estate.
Key Title & Escrow is a Florida title and escrow company that has been serving the real estate industry for over 23 years. During this time, we have cultivated a reputation for efficient closings of the highest quality. Our number one goal is customer satisfaction. Our team of qualified experts are here to offer their services to our customers and to ensure that all of the intricate details of any real estate closing are met. That's why we offer all of the services you might need in one place. We handle everything from title searches to Florida homeowner's insurance. Property title searches, judgement and lien searches, Florida title insurance, refinance transactions, record owner services, and a range of title and escrow services are some of the services you can get when you let Key Title & Escrow handle your closings.
Our real estate experts have the skill and knowledge to be with you every step of the way through your real estate transactions in Florida. Don't let the sometimes-confusing real estate laws and processes hinder you. Give us a call today or fill out the contact form on this website to have one of our real estate experts contact you to set up an appointment. Whether you are looking for a 1031 Exchange in Florida or you want help with using the 1031 Exchange for a primary residence, we can help you understand the laws and how you can still get the 1031 Exchange that can help you save money on your investment properties. Key Title & Escrow is your one-stop real estate closing destination.
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