A 1031 exchange is allowed under Section 1031 and defers gain on the sale and subsequent purchase of property held for business use or for investment. Taxpayers meeting these requirements can exclude up to $250,000 of gain if filing as a single taxpayer and $500,000 of gain if married and filing jointly. As long as you rent the property for two years and document its rental status, you will be eligible for the 1031 exchange on primary residence. Those filing jointly can exclude up to $500,000. It is possible to combine both Section 121 and Section 1031 on a primary residence under specific circumstances. Single taxpayers are entitled to a $250,000 exclusion and married taxpayers filing jointly are entitled to a $500,000 exclusion. Under Sec. Combining the 1031 exchange with the 121 exclusion rules can be a powerful income tax planning tool available to you. Generally, under Section 121 of the Internal Revenue Code, if used as a primary residence for at least 24 months within the last five years, one can exclude up to $250,000 in gain ($500,000 if married, filing jointly). A residence (Section 121) containing a home office or land that could be partitioned (Section 1031). Under Section 121, you can never exclude depreciation recapture (which is generally taxed at 25%). I am interested in selling my rental property and converti 1 Under Sec. With careful planning, it is possible to convert a rental property to a primary residence and utilize the Section 121 exclusion when selling to absorb a portion of the capital gain. Section 121 allows an individual to sell his/her residence and receive a tax exemption on $250,000 of the gain as an individual and $500,000 as a married couple. Section 121 allows for tax exclusion on the sale of a principal residence when the taxpayer lives in the property as their residence for two out of the past five years. Rev Proc 2005-14: Combining Primary Residence Exemption with a 1031 Exchange An effective way to minimize one’s tax liability is by combining the benefits of multiple tax code sections. A primary residence is considered to be a legal residence for the purpose of income tax and/or acquiring a mortgage. Members of the military are entitled to full exclusions regardless of the length of time they resided in the property if they move to satisfy service commitments. Homeowners who decide to combine a sale of their primary residence with a 1031 exchange need to comply with all of the rules of Sections 121 and 1031 in order for this to work. If the property was also used as rental property, you may be eligible for your primary residence exclusion and could complete a 1031 exchange to defer the rest of the gain. Any depreciation taken after May 6, 1997 must be recaptured. Question regarding 1031 exchange from primary residence to possible new rental property.I currently have a rental property and a primary residence in which I've lived for 6-years. The House of Representatives Committee Report, H.R.Rep. First, if you acquire property in a 1031 exchange and then convert it to your primary residence, you must own it at least five years before being eligible for the Section 121 exclusion. The taxpayer then moves into the property, converting it to a primary residence, and then decides to sell after a period of two years. After the two year period, you decide to move and start renting the property out. Section 121 allows individual taxpayers to eliminate up to $250,000, and married taxpayers (filing jointly) to eliminate up to $500,000, of gain from the sale of … 1033, on an involuntary conversion of a principal 2 If not, one spouse may only qualify for the exclusion. Section 121 allows an individual to sell his/her residence and receive a tax exemption on $250,000 of the gain as an individual and $500,000 as a married couple. Effective October 22, 2004 the primary residence exclusion contained in IRC §121 was amended to provide for a five year waiting period for property which was acquired using an IRC §1031 exchange. Homeowners who have resided in their residence for at least two of the last five years may be eligible for the Principal Residence Exclusion allowed under Section 121 of the Internal Revenue Code. PRIMARY RESIDENCE RULES - SECTION 121 "ANSWERS TO FREQUENTLY ASKED QUESTIONS ABOUT THE 1997 PRIMARY RESIDENCE TAX LAWS (IRC §1031)" This week we will discuss the primary residence rules and the various 1031 exchange rules related to property in which the taxpayer may have used it as a primary residence. The capital gain exclusion is available once every two years. 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