Scenario 1: Converting replacement property to a primary residence

Under this scenario, the taxpayer acquires a residential rental property as replacement property in his or her 1031 exchange and holds the property with the necessary investment intent. Eventually, the taxpayer converts the rental property to his or her primary residence. If the taxpayer has owned the property for a five-year period after acquiring it in the exchange and used it as its primary residence for two of those years, the taxpayer may sell it and receive the benefit of the primary residence tax exemption under IRS Code Section 121. Currently, Section 121 allows a tax exemption of $250,000 for an individual and $500,000 for a married couple.

Scenario 2: Estate Planning

Through properly structured estate planning, at the time of the taxpayer’s death his or her heirs may receive property owned in the estate tax-free. Inheritance tax laws at the time of death will determine the value threshold for each beneficiary. Essentially, all deferred tax associated with the inherited property is permanently eliminated upon the transfer to the heir.

Strategic 1031 Exchange Advisors, LLC, a Georgia limited liability company, is a qualified intermediary for 1031 exchanges only. It is not an accounting firm, law firm or registered investment professional and therefore is not qualified to give accounting, tax, legal or investment advice, and, further, cannot act in an agency capacity on behalf of its clients. This website is for informational purposes only and does not and is not intended to constitute accounting, tax, legal or investment advice. We advise you to consult with your accountant, attorney and investment professional on all matters related to your exchange.