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1031 allows investors in business properties to defer taxes on the profits of properties that are sold when they are sold to raise cash to purchase other business properties.
...aka the "Starker Loophole" because the sale and purchase do not need to be simultaneous to qualify for the tax deferral.
The Section 1031 benefit is not available to sellers or buyers of personal homes.
1031 Requirements, Benefits, & Process
The 7 key Rules
... you cannot use a 1031 exchange to sell your primary residence and buy another personal residence in CA ... or anywhere else in the United States...
...here is why:
1031 exchanges are for investment properties:
the fundamental principle of a 1031 exchange, as outlined in IRS Section 1031 of the Internal Revenue Code, is that it allows investors to defer capital gains taxes when they exchange one investment property for another.
Primary residences are not considered investment properties:
your primary residence is used for personal enjoyment, not for generating income or appreciating as an investment in the same way as a rental property or commercial building.
There is a separate tax exemption for selling your primary residence:
the IRS provides a tax exclusion for capital gains realized from the sale of a primary residence, which may allow you to exclude a certain amount of profit from taxation.
Possible Exception (with limitations):
while you can't directly use a 1031 exchange for your primary residence, there is a limited way you could potentially use it after a period of time:
Convert your primary residence to a rental property:
you could potentially convert your primary residence into a rental property and rent it out for a significant period (ideally a few years).
Then perform a 1031 exchange:
after establishing the property as an investment property, you may be able to use a 1031 exchange to sell it and acquire a like-kind investment property (like a rental property or commercial building), thereby deferring the capital gains tax from the sale of the former primary residence.
Important Considerations:
You cannot use the proceeds of the sale to purchase a new personal residence
if you use a 1031 exchange.
The new property must be an investment property
for the exchange to qualify.
Consult with a tax professional or a 1031 exchange lender specialist:
to discuss your specific situation;
to understand the eligibility requirements;
and
to discuss potential consequences of using a 1031 exchange.
BRRRR:
Buy, Rehab, Rent, Refinance, Repeat
Selling a primary residence to buy another primary residence with a 1031 exchange is not allowed.
The 1031 exchange is intended for investment properties, not personal residences.
1031 Exchange:
aka "like-kind exchange"
tax-deferred exchange under Section 1031 of the Internal Revenue Code (Form 8824) allowing real estate investors to defer capital gains taxes when they sell an investment property and reinvest the proceeds into a similar or "like-kind" property
Like-Kind Exchanges Under IRC Section 1031
KEY TAKEAWAYS
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All information is deemed reliable but not guaranteed.
Buyers and sellers should conduct their own due diligence and consult with qualified professionals before making decisions.