Recently I spoke to a client who was selling their house that they had lived in for less than 2 years. They had about $100,000 in capital gains on the home after all expenses. This taxpayer wanted to consider a 1031 exchange and was wondering if it was possible.
Principal Residence Exclusion
1031 may not be an option in this case if the house has been used as the taxpayer’s principal residence. For the IRC 1031 to qualify, you need to HOLD the replacement property for business or investment purposes.
It’s your home and generally speaking, you can’t do a 1031 exchange on your home. That’s usually not a big deal because under IRC section 121 the principal residence exclusion you get to take up to $500,000 of that profit tax return married filing a joint tax return or $250,000 for single filing.
But what if you must move early (prior to the two year period) because of:
- Job related circumstances?
- Health reasons?
- Or other unforeseen circumstances?
You may still be able to take a portion of the two year exclusion if any of the following apply.
- 121(c)(2) EXCLUSION FOR TAXPAYERS FAILING TO MEET CERTAIN REQUIREMENTS:
(2) Sales and exchanges to which subsection applies. This subsection shall apply to any sale or exchange if:
(A) subsection (a) would not (but for this subsection) apply to such sale or exchange by reason of–
(i) a failure to meet the ownership and use requirements of subsection (a), or
(ii) subsection (b)(3), and
(B) such sale or exchange is by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances.