Can I use a 1031 exchange to convert rental property into a primary residence?

Here's what you need to know.

If you're thinking about turning a rental property into your primary residence, you might wonder: Can a 1031 exchange help with this transition? While the IRS has strict rules on these conversions, understanding your options can help you maximize tax benefits and avoid costly mistakes. Let’s break down how a 1031 exchange and a primary residence can work together—and when they can’t.

How a 1031 Exchange Works

A 1031 exchange, or like-kind exchange, lets investors defer capital gains taxes when selling an investment or business property—if they reinvest the proceeds into another similar property. Typically, this applies to exchanging one rental property for another, but what if you want to convert a rental into your primary home?

Can You Convert a Rental Property Into a Primary Residence using a 1031 Exchange?

Yes, but it’s complicated. The IRS requires that properties involved in a 1031 exchange be held strictly for investment or business purposes. If you intend to move in too soon after acquiring the replacement property, you might disqualify the exchange and trigger taxes. However, with the right approach, it’s possible to legally transition a 1031 exchange property into your primary home over time.

Strategies to Convert a 1031 Exchange Property to a Primary Residence

• Meet the Holding Period Requirement – The IRS generally expects you to rent out the property for at least two years before converting it into a residence.

• Document Investment Intent – Keep records showing that the property was initially intended as a rental, such as lease agreements and advertising efforts.

• Follow the Five-Year Rule – If you plan to eventually sell the property and claim the home sale exclusion, the IRS requires you to own it for at least five years after the 1031 exchange.

What About Partial Use as a Primary Residence?

If you want to use part of the rental property as your primary home while still renting out the rest, only the rental portion qualifies for a 1031 exchange. This can be a useful strategy for deferring taxes while enjoying some homeowner benefits.

Get Expert 1031 Exchange Guidance

Navigating a 1031 exchange for a primary residence requires careful planning and expert guidance to stay compliant with IRS rules. At our San Diego-based firm, we specialize in 1031 exchanges and help investors nationwide. Whether you're in California, Texas, New York, or anywhere else, our experienced team will walk you through the process, ensuring you make informed, strategic decisions.

Ready to explore your options? Contact us today to learn how a 1031 exchange can fit into your investment strategy!