It is not possible to do a 1031 exchange for a property that is currently used as a primary residence.  Please see the Internal Revenue Bulletin 2005-7 for information about options that the property owner may want to consider.

Without 1031 exchange, the property owner may still claim the primary residence capital gain tax exclusion.  The property owner must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, the property owner must have:

1/ Owned the home for at least two years (the ownership test) 

2/ Lived in the home as a main home for at least two years (the use test)

If the property owner has a gain from the sale of the main home, the property owner may be able to exclude up to $250,000 of the gain from income ($500,000 on a joint return in most cases).

If the property owner can exclude all of the gain, the property owner does not need to report the sale on the tax return. If, however, the properthy owner has a gain that cannot be excluded, it is taxable. The property owner cannot deduct a loss from the sale of the main home. If the property owner has more than one home, the property owner can exclude gain only from the sale of the main home. Tax must be paid on the gain from selling any other homes. If the property owner has two homes and lives in both of them, the main home is ordinarily the one the property owner lives in most of the time. For example, the property owner owns and lives in a house in the city and also owns a beach house, which is used only during the summer months. The house in the city is the main home; the beach house is not.  

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