Buying A Second Home With 1031 Exchange

Added November 15, 2006 by Ilyce R. Glink

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Summary: A 1031 exchange cannot be used to purchase a personal residence. A 1031 exchange is used when selling investment property by replacing with another investment property that costs at least as much as the sold property. A 1031 exchange could be used to purchase an investment home that is rented out for a few years before converting it to a personal residence.

Q: I would like to sell land that I acquired in 1992 without paying capital gains tax. I am in the process of purchasing a home with my current home becoming a rental property.

Assuming I don't sell the land prior to closing on the home, when the land sells can I use that money to invest in either one of my current homes without being taxed?

A: The only way I know to defer paying capital gains tax on investment property is to use a 1031 tax free exchange, and buy a replacement investment property that costs at least as much as the property you're selling.

Unfortunately, you cannot use a 1031 exchange to purchase a personal residence. What you can do is use a 1031 exchange to purchase an investment home that you rent out for a couple of years, after which you may convert it into a personal residence.

Please consult with a real estate attorney who has done a number of 1031 exchanges in order to see if this will work for your situation.

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