Can I use the 1031 exchange to buy my primary residence?

[Kyle Carter]

I would like to sell a couple properties in the future, would I be able to use the 1031 strategy to buy one house that I would use as a primary residence? Would I be able to sell 10 houses in a package and use that to buy one house? 

[Ashish Acharya]

@Kyle Carter You cannot directly use a 1031 exchange to purchase a primary residence, as the IRS mandates that the replacement property must be used for investment or business purposes. While it is possible to convert an investment property acquired through a 1031 exchange into a primary residence, this requires careful planning. You would need to rent out the property for at least two years to demonstrate it was held for investment purposes and comply with IRS guidelines. Even then, the IRS may scrutinize the transaction if it appears the intent was to immediately convert the property into a personal residence.

Additionally, if you eventually sell the property after converting it to a primary residence, you may qualify for partial benefits under the Section 121 exclusion for primary residence gains. However, any depreciation claimed during the investment period must be recaptured and taxed. Selling multiple properties in a 1031 exchange to consolidate funds for one investment property is allowed, but the property must initially be used solely for investment.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.