1031 Exchange With Primary Residence

3 Replies

I currently have a rental property and a primary residence in which I've lived for 6-years. I am interested in selling my rental property and converting my primary residence into a rental property. After doing this, I would then purchase my new primary residence. 

With this, can I do a 1031 exchange on the rental property I am wanting to sell to my primary residence that I'm wanting to convert to a rental property?

Thanks for any insight. Looked in BPockets and can't find anything about this. 

Hi @Brett Parker

No, the purchase (and use) of a replacement property as your primary residence would not satisfy the "Qualified Use" requirement that the acquired replacement property be held for rental, investment or business use.  You could acquire the new replacement property with the intent to hold it as rental property for a period of time (long enough to demonstrate intent to hold for rental purposes) and then later opt to convert the rental property into your primary residence.  Similarly, the the conversion of your current primary residence into a rental property is not considered to be an acquisition of replacement property.  

@Brett Parker

that won't work. But there may be a better scenario for you. You've lived in your primary long enough that it would qualify for the primary residence exemption which means you can sell and take the first $250K of profit ($500K if married) tax free. You don't have to reinvest. It's just tax free money.

Sell that primary and use tax free proceeds to purchase another primary residence.

I know you talked about turning your current primary into a rental. But if there are other properties that might make good rentals you can sell the current investment and 1031 into a new rental while releasing those tax free dollars from the sale of your current primary. And buying another primary that way lets you restart the clock for your next tax free primary sale.