WHAT YOU NEED TO KNOW ABOUT COMBINING A 1031 EXCHANGE AND A SECTION 121 EXCLUSION
A 1031 Exchange is a powerful tool that can allow real estate investors to defer capital gains taxes and depreciation recapture when selling appreciated property. Depending on the circumstances, it may be possible to combine a 1031 Exchange with a Section 121 Exclusion to achieve an even greater tax advantage.
What is a 1031 Exchange?
A 1031 Exchange is a part of the U.S. Tax Code that allows investors to exchange one investment property for another without paying capital gains taxes and depreciation recapture at the time of the sale. To qualify for this tax treatment, investors must follow all of the IRS rules and guidelines. This includes the 45-day rule and the 180-day rule.
What is a Section 121 Exclusion?
A Section 121 Exclusion is a tax rule that allows you to exclude up to $250,000 in capital gains ($500,000 for a married couple filing jointly) from the sale of your primary residence. To qualify for a Section 121 Exclusion, you must have occupied the residence for two of the last five years. However, these 24 months do not have to be consecutive.
A Section 121 Exclusion can only be used once every two years. This tax break is also available exclusively for primary residences. It cannot be used for the sale of a vacation home or a rental property.
Combining a 1031 Exchange with a Section 121 Exclusion:
Since a 1031 Exchange is exclusively for business or investment properties and a Section 121 Exclusion is only for primary residences, they are rarely able to be used together.
Investment Property Converted into a Primary Residence
1031 Exchange Rental Property Converted into a Primary Residence
Primary Residence Converted into Rental Property
This document is designed for general information only. The information presented in this document should not be construed to be formal legal or tax advice nor the formation of a lawyer/client relationship.
For more information on this and other topics, please contact Kevin via any of the channels listed below:
📧 kevin@kmckernan.com | 📞 718-317-5007