Ever thought about moving into one of your investment properties? It’s a common dream! The good news is, you might be able to do it without a huge tax bill, thanks to something called a 1031 Exchange.
What’s a 1031 Exchange?
Think of it as a special tax break. When you sell an investment property, you usually owe taxes on your profit. A 1031 exchange lets you swap one investment property for another “like-kind” investment property and put off paying those taxes.
The Catch: It Must Be an Investment First!
You can’t just buy a new house with a 1031 exchange and immediately move in. The IRS says your new property must be an investment at first. This is where many people get tripped up! The IRS “Safe Harbor” Rule for Your Future Home: To make sure the IRS sees your new property as an investment (and not your future home from day one),
here’s what you need to do:
1. Rent it Out for 2 Years: You must own the property for at least 24 months after the exchange.
2. Rent it Fairly: For both of those 12-month periods, you must rent it out to someone (not family or friends at a discount!) for at least 14 days.
3. Limited Personal Use: During those same two 12-month periods, you can only use the property yourself for the lesser of:
- 14 days,OR
- 10% of the days it was rented.
After 2 Years: Move On In!
Once you’ve met these rules for two full years, you can convert the property into your primary residence!
Selling Later? More Tax Perks!
If you live in it for at least two of the five years before you sell, you might also qualify for the Primary Residence Sale Exclusion (Section 121). This allows most individuals to exclude up to $250,000 ($500,000 for couples) of profit from the sale of their main home, in addition to the 1031 benefits.
Key Takeaway:
This is a smart way to transition from investing to your dream home, but it requires patience and strict adherence to IRS rules. Always talk to a tax professional and a 1031 exchange expert before you make any moves