1031 Exchange on a Primary Residence? Use Section 121 Instead

What Section 121 Gives You

Sell a home you've owned and used as your principal residence for 2 of the last 5 years and Section 121 EXCLUDES — not defers, excludes — up to $250,000 of gain, or $500,000 married filing jointly. No replacement purchase, no QI, no deadlines. The caps aren't indexed for inflation and are unchanged as of 2026.

Where the Two Stack

Convert your former home to a rental, run it as a genuine investment property, and later sell: you can take the 121 exclusion on the qualifying gain AND 1031 the rest into investment property — including Texas industrial. Timing matters (the 2-of-5-year window, non-qualified use rules), so run the sequence with your CPA before listing.

Sellers with big home-equity gains above the caps are exactly who this combination serves.

My gain is over $500k. Options?

The excess above the exclusion is taxable on a straight sale. The convert-to-rental-then-1031 sequence is the main route to defer the rest.

How long must it be a rental before a 1031?

No fixed statute — intent controls. The Rev. Proc. 2008-16 safe harbor uses 24 months of qualifying rental use as the clean standard.

Can I move INTO a 1031 replacement property later?

Eventually, carefully — after genuine investment use. Immediate move-in torpedoes the exchange. Sequence it with a professional.