IRC Section 1031 allows real estate investors to relinquish or sell one property and replace it with another like-kind property and defer the payment of any capital gains tax that would normally be due.
Basic rules of a traditional tax-deferred exchange are:
- Relinquished and replacement property must be like-kind
- Real estate must be used for business or investment purposes
- Replacement property must be the same or greater value than the property relinquished
- Boot – either in cash or a cash-like benefit – can not be received by the investor
- Name on the title on the replacement property must be the same as on the relinquished property
- Replacement property must be identified within 45 days of the closing of the sale of the relinquished property
- Replacement property must be purchased within 180 days of the closing of the sale of the relinquished property
Normally the IRS does not allow you to conduct a 1031 exchange with your primary residence. That’s because the home that you live in isn’t being used as an investment property or being held for business purposes. Instead, your primary residence is used to provide shelter for your family.
However, there are some exceptions to this rule. IRC Section 121 of the Internal Revenue Code gives some situations where you can conduct a 1031 exchange using your primary residence.
