What happens when a residence is exchanged?

June 9, 1999

From:  Richard Ault
Date:  Tue, 08 Jun 1999

I would like to know about the tax consequences under the new (1031) law when a private residence is exchanged for another more costly residence. What is the tax exposure of the higher valued exchanger when he trades down and what, if any, are the tax consequences of the individual trading up? Can a three way exchange be arranged with all items being owner occupied residences? How about an investment property (ie. 4-plex) and two owner occupied residences in 3-way exchange?

Ric Ault


Date:  Wed, 09 Jun 1999

Hi Ric,

Apparently, you have been misinformed.

A personal residence does not qualify for a tax-deferred exchange under IRC Section 1031. The only way to bring the transaction under Section 1031 is to convert the residence to income producing property, such as a rental, for some time before making an exchange.

Please visit our site again. There is an article in the personal tax planning section called Your Residence--The Ultimate Tax Shelter? Although the article needs some update, the basic rules relating to the sale of a principal residence are discussed there.

Good luck to you!
Mike Gray

We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.

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