Can You Do a 1031 Exchange on a Primary Residence?

Can you sell your home and avoid taxes on a 1031 exchange? It makes sense. The concept is simple, but the answer isn’t. Typically, your residence isn’t qualified.

This guide makes what matters easy to understand, without overcomplicating it.

What Is a 1031 Exchange?

If you’re selling an investment property, you can reinvest the profit in another one through a 1031 exchange. You won’t be paying capital gains tax immediately. You’ll be deferring the taxes by investing the whole amount.

However, this is only available on business or income properties—not your own residence.

Why Your Primary Residence Doesn’t Qualify

The IRS views a primary home as a personal-use property. It’s where you live. If it doesn’t earn rental income or serve a business purpose, it’s not eligible.

Here’s a quick breakdown:

Only properties used for income or investment purposes meet the requirements.

Turning Your Home Into a Rental First

There is one option that may work. You can rent your home out before you sell it. This changes how the IRS sees the property.

But this shift takes time. Renting it for a short period is not enough. You need to treat it like a real rental.

How to Do It Right:

• Move out and lease it to actual tenants.
• Report the income on your tax return.
• Do not use it personally while rented.
• Keep it rented for one to two years.

Tax experts often suggest holding it as a rental for at least 24 months to show serious intent.

Mixing 1031 Exchange with Section 121 Exclusion

If you’ve lived in your home for two out of the last five years, you may qualify for the Section 121 exclusion. This rule lets homeowners avoid tax on part of their gains.

You may be able to combine this with a 1031 exchange in some situations.

For example:

• You live in the house for two years.
• Then you rent it out for another two.
• When you sell, you may be able to use both exclusions.

The IRS allows this mix in certain cases, but the steps must be clear and documented.

Can You Buy a New Primary Residence Using 1031?

Yes—but you can’t move in right away.

You have to rent it out first. Only after holding it as a rental for a while can you convert it into your home.

This only works if you follow all timelines and treat it as a rental first.

Why You Still Need to Be Careful

Even if your timing is right, you need to document everything. If the IRS reviews your case, they’ll want proof you followed the rules.

Here’s what to keep in mind:

• Use a qualified intermediary.
• Follow the 45-day identification rule.
• Close the new property within 180 days.
• Keep all records and rental history.

If you live in California, there are extra state-level rules too. 👉 Read our full guide on 1031 Exchange California Rules

When You Don’t Need a 1031 Exchange

Sometimes, you don’t need a 1031 exchange at all. If your home qualifies for the Section 121 exclusion, that may cover your full gain.

Here’s how the two compare:

So if your home didn’t gain much value—or you meet the exclusion cap—you may not need to do anything else.

Final Thoughts: Know Before You Sell

A 1031 exchange can help you avoid taxes—but not if you’re selling a home you live in. To qualify, you need to change how the property is used, and that takes time and planning.

This isn’t a loophole. It’s a legal strategy that only works if you meet every condition.

Before you make a move, talk to a 1031 exchange professional. A mistake could mean paying more in taxes later.

FAQs

Q: Can I do a 1031 exchange if I only rented my home for a few months?
A: That’s usually not long enough. The IRS wants proof that it was a true rental.

Q: Can I use both Section 121 and 1031 in one deal?
A: Yes, but only if you meet the rules for both and use each part properly.

Q: Do different states have extra rules?
A: Yes. For example, California has its own tracking rules. Learn more here

Q: What about inherited property—can that be part of a 1031 exchange?
A: No need. In most cases, the step-up in basis means there’s no tax owed anyway.