---
title: What You Need to Know About Combining a 1031 Exchange and a Section 121 Exclusion
description: It may be possible to combine a 1031 exchange with a Section 121 exclusion to achieve an even greater tax advantage. Let's look at each of these tax codes and how they can work together.
image: https://www2.1031dst.com/hubfs/close%20up%20of%20businessman%20hands%20signing%20contract.jpeg
---
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# Fortitude's Insights
# [What You Need to Know About Combining a 1031 Exchange and a Section 121 Exclusion](https://www2.1031dst.com/insights/what-you-need-to-know-about-combining-a-1031-exchange-and-a-section-121-exclusion)
By [Jeffrey Kiesnoski](https://www2.1031dst.com/insights/author/jeffrey-kiesnoski) | 13, September 2023
[READ NOW](https://www2.1031dst.com/insights/what-you-need-to-know-about-combining-a-1031-exchange-and-a-section-121-exclusion)
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[Jeffrey Kiesnoski](https://www2.1031dst.com/insights/author/jeffrey-kiesnoski)
A 1031 exchange is a powerful tool that can allow real estate investors to defer capital gains taxes and depreciation recapture when selling appreciated property. Depending on the circumstances, it may be possible to combine a 1031 exchange with a Section 121 exclusion to achieve an even greater tax advantage. Here’s a closer look at each of these tax codes and how they can work together.
## **What is a 1031 Exchange?**
A 1031 exchange is a part of the U.S. tax code that allows investors to exchange one investment property for another without paying capital gains taxes and depreciation recapture at the time of the sale. To qualify for this tax treatment, investors must follow all of the IRS rules and guidelines. This includes the [45-day rule](https://www2.1031dst.com/insights/daniel-raupp/overcoming-hurdles-in-the-45-day-window-of-a-1031-exchange) and the 180-day rule.
The 45-day rule states that you have 45 calendar days from the date of the sale of your relinquished property to identify, in writing, one or more replacement properties. You also have 180 days from the date of your property sale to close on at least one of the properties you identified.
To qualify for a 1031 exchange, both the relinquished and replacement properties must be “held for investment purposes or for use in a trade or business.” Generally, this means that the property cannot be your primary residence. However, there are a few exceptions.
## **What is a Section 121 Exclusion?**
A Section 121 exclusion is a tax rule that allows you to exclude up to $250,000 in capital gains ($500,000 for a married couple filing jointly) from the sale of your primary residence. To qualify for a Section 121 exclusion, you must have occupied the residence for two of the last five years. However, these 24 months do not have to be consecutive.
A Section 121 exclusion can only be used once every two years. This tax break is also available exclusively for primary residences. It cannot be used for the sale of a vacation home or a rental property.
## **Combining a 1031 Exchange with a Section 121 Exclusion**
Since a 1031 exchange is exclusively for business or investment properties and a Section 121 exclusion is only for primary residences, they are rarely able to be used together. However, there are three scenarios where you may be able to choose between the two options or take advantage of both tax benefits at once.
### **Investment Property Converted into a Primary Residence**
If you purchased an investment property and later decided to use it as your primary residence, you would need to live in it for at least two years to qualify for a Section 121 exclusion. Once you’ve satisfied the two-year rule, you can then decide whether you want to take the Section 121 exclusion or use the property for the first part of a 1031 exchange.
### **1031 Exchange Rental Property Converted into a Primary Residence**
If you purchase an investment property using a 1031 exchange and then decide to move into it, the rules are a bit stricter. In this case, the IRS wants to ensure that the property was truly acquired for investment purposes. To avoid having the 1031 exchange disqualified, you must use it as a rental for at least 18 months.
Once this requirement is satisfied, you’ll need to live in the residence for at least 24 months to qualify for a Section 121 exclusion. Finally, you’re required to hold the property for a minimum of five years before you can claim a Section 121 exclusion on the sale.
### **Primary Residence Converted into Rental Property**
The final scenario occurs when you convert your primary residence into a rental property. To qualify for a Section 121 exclusion, you must have lived in the home for two of the past five years. To prove that the property is now held for investment purposes, you would also need to use it as a rental property for at least 12 to 18 months. If you meet both of these requirements, you should be able to qualify for a 1031 exchange and claim the full Section 121 exclusion.
## **Some Final Thoughts**
Successfully combining a 1031 exchange and a Section 121 exclusion requires years of advanced planning and should only be done with the help of experienced professionals who are well-versed in the process. If you would like to learn more about this strategy or about 1031 exchanges in general, [contact us](https://fortitudeinvestments.com/contact/) to schedule a free consultation.
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# [Jeffrey Kiesnoski](https://www2.1031dst.com/insights/author/jeffrey-kiesnoski)
Since Founding Fortitude Investment Group, Jeffrey has been providing accredited investors with real estate investment opportunities utilizing the Delaware Statutory Trust (DST) for their 1031 exchange needs. A licensed registered representative since 1995, he provides wealth management solutions for investors nationally and internationally, focusing on access to multiple investment products from multiple firms.
This is for informational purposes only and is not an offer to buy/sell an investment. There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice. Please speak with your legal and tax advisors for guidance regarding your particular situation.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA) Fortitude Investment Group is independent of CIS, CAM, and CIA.
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