IPX1031 Insight Blog

Converting a Principal Residence to Minimize Taxes by Combining IRC §1031 and §121

IRC §1031 permits the deferral of capital gains tax on investment or business use property that is exchanged for like-kind investment or business use property of equal or greater value.  The taxpayer’s current principal residence, being personal use property, will not qualify for a §1031 exchange.  However, a taxpayer selling a primary residence that has been converted into use as a rental property for a period of time prior to sale, or that has been used partially for business purposes, such as a home office or a duplex, half of which is rented, may be able to combine IRC §121 and §1031 to maximize deferral of capital gains tax.

When the Exchanger’s principal residence is used partially for business purposes, the Exchanger must allocate between the personal use and the business use.  The portion allocated to business or investment purposes qualifies for an IRC §1031 exchange and the residence portion may qualify for the exclusion from capital gain for personal residences under IRC §121. Revenue Procedure 2005-14 provides guidance on the concurrent application of IRC §121 and §1031.

§121 permits an exclusion from realized capital gain of $250,000 for a single person and $500,000 for a married couple on the sale of a home used as a primary residence for any two of the past five years, but there are some limitations.  IRC §121(b) requires the maximum exclusion to be reduced, based upon the ratio of time that the primary residence had a non-qualified use (after 12/31/08) during the taxpayer’s ownership that either preceded the home’s use as a primary residence or occurred between periods of use as a primary residence.  Additionally, §121(d)(10) requires that a residence acquired as a Replacement Property in a §1031 exchange must be held by the Exchanger for a total of five years before it will qualify for the §121 capital gain exclusion.

Converting Your Primary Residence Into Rental Property 
Opportunities of the 1031 Exchange
Capital Gain Estimator
1031 Knowledge Center

Locate a 1031 Expert In Your Area

Recent Posts

Tax Straddling – 1031 Exchanges at the End of the Year

updated November 2023 Tax Straddling - Pay Taxes in 2024 or 2025? When a 1031 Exchange is opened in the latter part of the year, a seasonal treat worth mentioning is “tax-straddling.” If that exchange is successfully completed, those taxpayers defer taxes to receive...

1031 Cybercrime

Nationwide, fraud and cybercrime continue to escalate. In our recent research, Americans shared that 1 in 3 have been victims of identity theft and 55% have been victims of scams. Unfortunately, incidents are trending upward, which is impacting commercial real estate...

Graham Beene Expands IPX1031 Arkansas, E Texas & N Louisiana

IPX1031 Arkansas, East Texas and Northern Louisiana Amps Up 1031 Coverage with Graham Beene ​  IPX1031 Promotes Graham Beene into 1031 Exchange Sales DALLAS, TX (October 12, 2023) - Investment Property Exchange Services, Inc. (IPX1031) is pleased to announce the...

Pin It on Pinterest