Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Posted by taxguru on January 14, 2006


Subject: Exchange Question

I’m selling a property for a more expensive one. I’m thinking about doing a 1031, a friend of mine told me I wont have to pay taxes on it if I deferr the income as personal income over a 5 year period. Reason being I lost my job because of a accident and can’t work so I have no income except for the money from this property I’m selling, part of the money will be used to buy the new property/ Can this be done or is he wrong? Should I go ahead and do the 1031? also on the new land Im buying I will be building a house to live in for two years then I’ll built another on the same property and do the same again…….Thank You



You really need to be working with a tax pro who can go over all of the options you have.  There are several issues involved here.

The next best thing to a 1031 exchange is an installment sale, where you receive the sale price over multiple years and then report a pro-rated portion of the gain on your tax return. 

You can do a combination of a 1031 exchange and installment sale; but this usually results in 100 percent of the installment note principal payments being taxable in the year received.

In regard to reinvesting 1031 proceeds into a property that you intend to use as a primary personal residence, that is not allowed.  The replacement property has to be used for business or investment purposes.

You weren’t really clear on the type of property you are selling.  In case it is your primary residence, Section 1031 doesn’t apply.  There are entirely different rules, which you can see explained here.

Any competent tax pro should be able to help you with exactly what your situation is.

Good luck.

Kerry Kerstetter


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