Can I 1031 exchange my personal residence...?

Other QI's have told me I could do an exchange on my personal residence if I keep it quiet. Is this risky?

Yes it is risky -- AND it's an unnecessary risk at that. You don't need to do a Section 1031 exchange on your primary residence to defer or eliminate taxes. If you've lived in your house for two out of the last five years, you can claim the exemption (under Section 121 IRC) on capital gains up to $250,000 for single tax filers and up to $500,000 for joint returns. And, you can take this exemption every two years!

If your gains are over these limits, you might be able to do a §1031 exchange if you've treated the property as investment or for business use for at least the last year and a day. In this case, you can sell the property, use the exemption under Section 121, and for the rest of the gain defer it using Section 1031. This needs to be carefully done and documented, so use a Qualified Intermediary that has both legal and accounting skill sets and experience.

If you've lived in the house for less than two years, you still might be able to take what is called a partial exemption or a Reduced Maximum Exclusion. But this is not a Section 1031 exchange. Check with your tax advisor (or click here and scroll down to page 14: http://www.irs.gov/pub/irs-pdf/p523.pdf).

One final thought, if you are wanting to sell your investment property, one that qualifies for a Section 1031 exchange, and buy into what COULD become your personal primary residence -- then that MIGHT be possible. Discuss this thoroughly with your QI!

--The Experts

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