Why your home doesn't qualify
1031 exchanges require property held for investment or business use. A primary residence is personal-use property, so it's out — no matter how much it has appreciated.
The homeowner's rule is better anyway
Section 121 lets you exclude — not defer, permanently erase — up to $250,000 of gain ($500,000 married filing jointly) when you sell a home you've owned and lived in for at least 2 of the last 5 years. No intermediary, no deadlines, no replacement purchase, and reusable every two years. For most homeowners, this beats deferral outright.
When the two rules stack
The interesting cases are mixed-history properties:
- Home converted to rental: rent your former home out and sell within the window where you still meet the 2-of-5-year test, and you can claim the 121 exclusion and 1031-exchange the gain above it — including deferring the depreciation recapture from the rental years, which 121 never covers.
- Duplex you live in: the unit you occupy gets Section 121; the rented unit qualifies for a 1031. One sale, two tax treatments.
- Rental converted to home: works too, but with proration rules and a 5-year catch — covered in moving into your exchange property.
Example
A married couple lived in a house for years, then rented it for two, and now sell with a $700,000 gain including $30,000 of depreciation. Section 121 erases $500,000. The remaining $200,000 of gain plus the recapture can ride into a replacement rental through a 1031 — total tax due now: potentially zero.
Estimate the tax on the rental portion →See what is at stake above your Section 121 exclusion