One of the most common concerns that investors come up with is: 'can I exchange my primary residence using a 1031 exchange?' Maybe not everyone, but certainly some can. But can you? If you ask IRS, you'll get a direct No. However, as it happens under the Internal Revenue Code, there are exceptions. Let's consider a situation: what if after some time you choose to convert your primary residence into a rental property? Here's the answer. If you turn your primary home into a rental property (i.e., you rent it to tenants who get the possession, and you no longer use the property as your primary residence), you may be able to do a 1031 exchange on that property. Although the IRS doesn’t clearly state how long you must hold the property for rental purposes, the majority of tax professionals believe that one to two years should be enough, given you can show the property is used for investment purposes. The IRS has clear views on the following two points:
Certainly, you may not be able to do a 1031 exchange on your primary residence. However, if you convert your primary residence into a rental property and hold onto it for some time, you are good to go for a 1031 exchange. Therefore, while rules (those established by the IRS) can't be broken, bringing the exceptions into light can transform your investment portfolio. Discuss your 1031 exchange questions, concerns, and requirements here, call us at 888-993-2835.
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The term Like-kind properties are not specifically defined in the tax code. IRC Section 1031 doesn't restrict "like-kind" property to certain types of real estate. Any real property that is held for productive use in a trade or business or for investment is known as "like-kind" property. The term refers to the Character or nature of the property, rather than its quality or grade. Real estate properties are mostly considered as "like-kind" regardless of whether the property is improved or not improved. The 1031 exchange allows the investor to exchange real properties with like-kind real property. Which properties are not considered as ‘like-kind’? A Primary or Secondary Residence: The taxpayer or exchanger’s primary or secondary residence is not considered as like-kind and does not qualify for a 1031 exchange. It should be noted that primary residences do qualify for the tax exclusion, with certain limitations, but under IRC Section 121 – not Section 1031. Property that are held "primarily for resale" or "dealer property" are prohibited from tax deferral under IRC Section 1031. Qualifying Real Property The real estate properties which are exchanged are extremely broad. Any real estate property held for productive use in a trade or business or for investment- regardless of the fact it is improved or not is considered "like-kind." Improvement in real estate allude to the quality or grade, not the character or nature of the real property. Properties that are viewed as like-kind are:
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October 2019
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