1031 on regular income?

[Andrew DeShong]

I purchased an SFR in September and have tenants in there. I was contacted today with an offer to purchase the home for quite a bit more than I have into it. I know you can do a 1031 exchange on the capital gains of a property, but can I do it on regular income if I sell before the 1 year point? I'm trying to figure out a number at witch I'm willing to sell to make displacing my tenants worth it, as id have to buy them out of their lease and would prefer to have them happy about it.

[Dave Foster]

@Andrew DeShong, it's not the type of gain that is excluded that is important.  It is the use and intent of your ownership of the property.  If you purchased the property with the intent of holding for productive investment use and can demonstrate that then it qualifies for  a 1031 exchange no matter how long you have owned it or the type of gain it will generate.  the statute simply reads that "there will be no recognition of gain...".  

One of the oldest strongest demonstrations of your intent is the actual use of the property.  You have a rentor in there.  It is not for sale.  And you have had an unsolicited offer to purchase.  Your intent was to hold and an external force is changing that intent.  I'd say you have a very strong case.

Now that being said, the unsolicited offer is a fortunate accident  to happen.  It begins to look like something different when the same "accident" happens  several times a year.  So never do something just because you can get away with it.  But also,  never hold off on doing something you know is appropriate and beneficial just because it might be questioned.