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1031 Exchanges

In real estate investments

The tax laws have evolved. The Shrayer Law Firm helps investors navigate the real estate market and make wise decisions with their assets. A 1031 exchange can help protect you from capital gain tax and facilitate significant portfolio growth and increased return on investment by allowing you to exchange one investment property for another investment property and defer any capital gains tax. Most professionals would tell you that your best case scenario is paying a long-term capital gain rate of 15%. However, what if you converted the investment to your primary residence and then declared homestead on the property?

This can be done so long as the property has been a rental for two years. In each of the two years the property must be rented out to non-family 14 overnights per year and personal use is limited to no greater than 14 overnights or 10 percent of the time rented. Therefore, a part time rental on AirBnB would qualify. Like all things in law, this can get complicated which is why it is important to have an astute lawyer/financial advisor on your side. You cannot have the intent when you purchase the property to make it your primary residence, but how can the IRS assess your intent when you purchase something?

Converting rental property acquired in a 1031 exchange to a primary residence blends Section 1031 with Section 121 that provides the $250,000/$500,000 exclusions. To benefit from Section 121, the converted property must be held for five years with the first two as a rental also known as non qualified use. At the end of five years, 3/5 of the gain is excluded from taxation. Therefore in a $100,000 profit, only $40,000 would be taxable or on a $500,000 in profit, only $200,000 would be taxable because 3/5 years the property was your primary residence.

There are many technicalities and loopholes to 1031 exchanges. The Shrayer Law Firm can navigate you to use the laws to work in your favor.