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Investment property to primary residence (and 1031 Exchange)

August 1, 2008 Leave a comment

The real estate market is on sale right now. You may already own investment properties and you are buying more. At one point you will sell them.

The profit you make on investment property is tax-able. However, you originally purchased it as an investment property (with proof of your intention), then, due to unexpected reasons you have to use it as your primary residence. Then you live there for 2 years and the profit will be tax free.

What if the investment properties are in the states that you do not plan to relocate to? IRS section 1031 (aka 1031 Exchange) allows you to use the proceed from investment properties to buy other investment properties without having to pay the tax on profit.  So, sell them and buy a big house in a dream location of your own. Use it for investment/rental first (people suggesting a year) then move in with good reasons. Stay 2 years and you can claim the profit.

That said, real estate seems a real good investment tool. Low risk, with possible continuous stream of income, and the earnings are tax-free if plan well.

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Categories: Finance