1031 Helps Save On Taxes
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM #LAW 687
By Ilyce R. Glink and Samuel J. Tamkin
Summary: A reader is hoping to use a 1031
Exchange to purchase a new home. Sam and Ilyce advice their reader on how to
use this tax break to legally make the new purchase a permanent residence.
Q: I want to sell a home that I own and then buy a replacement home using a
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After I buy it, I want to rent it for two years and then move into it. If I
move into it, will it kill the benefits I got from using a 1031 exchange?
A: With an estimated 15 million Americans owning investment property, more
people are using 1031 tax-free exchanges in order to defer capital gains.
A 1031 exchange is a provision in the Internal Revenue Code that permits an
owner of investment property to sell the property and buy a new property without
having to pay any taxes on the sale of the old property. To use a 1031 exchange,
an investor must comply with strict rules relating to the use of the proceeds
from the sale of the old property and strict timing requirements relating to
the purchase of a new investment property.
Basically, once the old property is sold, the investor has 45 days to pick
a new property and comply with certain written notice provisions. The investor
then has 180 days in which to close on the purchase of the new property.
If the investor complies with these provisions, the investor does not have
to pay any federal income taxes on the sale of the old property, no matter how
much money was made on the old property.
However, the investor must buy a like kind property upon the sale of the old
property. If the old property was an investment in real estate – an apartment
building, the investor must buy a new investment in real estate of equal or
The investor can buy multiple homes, a farm or other real estate. But the real
estate can’t be the investor’s home. The rules specifically prohibit
the sale of investment property for the purchase of a home to be used as the
The one exception to this rule is that the investor can move into the home
and use it as his primary residence if, after he has purchased it, he has rented
it out for at least two years. Thus, he would have sold an investment property
and replaced it with an investment property.
Recently, the IRS clarified some information in the area of converting investment
properties into primary residence.
After an investor has rented the home for two years, he can move into the property
and live in it as his primary residence. But if he decides to sell it, he must
wait a total of five years (from the date he bought the replacement property)
to then obtain the benefit of the other great tax law that allows a homeowner
to exclude the gain from the sale of a primary residence ($500,000 exclusion
for married couples and $250,000 for individuals).
If the owner does not wait the full five years, he probably can’t get
the benefit of these tax exclusions. For more details, please consult with your
tax preparer or accountant.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce
R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your
Home Faster and For More Money In Any Market. If you have questions for
them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022
or contact them through Ilyce’s website www.thinkglink.com