1031 option question Help!

I have a second home in Fl. I was going to rent it out, then thought about selling and purchasing another Fl property. Would this property qualify for a 1031 exchange?

How long have you lived in it? if it is 2-5 years there is a law in place that allows you to exchange it for equal or more, on a owner occp. property.

Second homes are generally held for personal use – hence the name “second” home. Second homes are not eligible to participate in a 1031 exchange.

Second homes are also generally not your primary residence (it’s your “second home”) and therefore do not usually qualify for the capital gains exclusion under the two of last five year ownership and occupancy rules.

Dave,

I have two questions for you? I may have misunderstood your response.

  1. Do you have to own a property personally or as an investment property to use a 1031 exchange? Or does it matter?

  2. If you have to use it personally do you have to live in it for 2 years within a 5 year period to use a 1031 exchange?

Thanks,

Joe

Joe,

Let’s take each question and answer them individually, without linking the second question back to the first.

1. Do you have to own a property personally or as an investment property to use a 1031 exchange? Or does it matter?
Property that is USED for the production of income or held long term for future appreciation is investment property. Property that is USED as your primary residence or as a second home is personal use property. Property that is USED in your trade or business (e.g., a manufacturing plant) is business property. The 1031 exchange is limited to investment property and to business property. It is the use, not ownership, that determines whether a specific property may participate in a 1031 exchange.

Personal use property is not eligible to participate in a 1031 exchange as either the relinquished property nor as the replacement property.

2. If you have to use it personally do you have to live in it for 2 years within a 5 year period to use a 1031 exchange?

A second home is a home reserved primarily for your personal use – a vacation home, for example. Perhaps you winter in FL, then close up the property for the rest of the year (My wife and I have a few friends in NH who do just that). You have a primary residence elsewhere, and it is only your primary residence that is eligible for the Section 121 capital gains exclusion.

Section 121 of the Internal Revenue Code allows you to exclude up to $250K (per taxpayer) of the profit on the sale of your primary residence provided you have both owned and occupied your home as your primary residence at least two of the five years prior to the sale.

Section 121 of the Internal Revenue Code only applies to your primary residence, not to your second home as visionary implied. Section 1031 of the Internal Revenue Code only applies to investment or business use property and not to your primary residence or your second home.

Does this help??

Dave,
That cleared it up for me.

Thanks, Joe