287. Exploring Advanced 1031 Exchanges and Partnership Divisions with Matt Rappaport, Esq., LL.M.
Tax Smart Real Estate Investors Podcast
Navigating 1031 Exchanges and Primary Residence Exclusions
1031 exchanges and primary residence exclusions provide strategic opportunities for taxpayers, especially those dealing with appreciated properties in high-value markets. To benefit from both, a clear understanding of their interactions is crucial. Section 121 allows for a home sale exclusion based on the use of the property as a primary residence for at least two of the last five years before sale. Taxpayers must ensure the correct usage order: the primary residence exclusion applies first, followed by the 1031 exchange, based on the property's usage at the sale's time. Careful adherence to the two-out-of-five rule is essential, as exceeding three years of rental use can invalidate the primary residence status. Taxpayers should consult regulations to ascertain eligibility for the full exclusion, taking into account their specific situations. When selling a property, the exclusion amount may be applied tax-free, but the subsequent 1031 exchange must comply with all formalities, including using a qualified intermediary for the remaining amount. Following the roadmap laid out in regulations ensures compliance, and taxpayers can successfully navigate the combined benefits of Sections 121 and 1031 without entering ambiguous planning territories.
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