Over the years, David and Tom Moore, the Exchange Brothers of Equity Advantage, have helped real estate owners navigate many complex life transitions, including divorce and the uneven way property is often divided. In those situations, one spouse often keeps the primary residence while the other walks away with income properties they may not want to live in.
That split can create very different financial paths, especially for the spouse who receives investment property instead of a home.
Tom Moore points out that if you are the spouse who keeps the primary residence, the outcome is usually more straightforward. You continue living in the home. Daily life may change, but the real estate decision itself often does not.
The situation becomes more complicated for the spouse who ends up with an investment property.
When You Receive an Investment Property You Do Not Want
According to Tom, everything depends on what that spouse plans to do next. Some people are comfortable living in the property they receive. Others are not. If the property does not fit their lifestyle, their job location, or their personal preferences, decisions have to be made fairly quickly.
If the spouse plans to move into the property and live there, that is allowed. Converting an investment property into a primary residence is possible. However, David explains that this decision comes with tax consequences that many people do not anticipate.
Once you convert the property, time becomes a critical factor.
Understanding the Section 121 Waiting Period
Tom explains that if you move into the property, you cannot immediately benefit from Section 121, which provides an exclusion on the sale of a primary residence. You must live in the property for a period of time before you can start using those benefits.
This is where confusion often sets in.
David explains that you will not receive the same tax treatment as someone who buys a new house, lives there for two years, and then sells it. In that scenario, the owner may qualify for the full primary residence exclusion.
When you convert an investment property into a residence, the calculation is more complicated. The timeline matters. How long the property was rented matters. How long you live there matters. The benefit does not switch on all at once.
This is not a simple two year clock that resets the property’s history.
Why Timing and Expectations Matter
One of the most common missteps David sees is assuming that living in the property for a short period will automatically unlock the full Section 121 benefit. That assumption can lead to disappointment when the property is eventually sold.
Instead, the benefit builds over time and may still fall short of what would be available if the property had always been a primary residence.
Tom stresses that these realities should be weighed carefully before moving in. If you already know the property is not a long-term fit, converting it may not support your broader goals.
Creating Better Options With a 1031 Exchange
After a divorce, the spouse who receives an investment property is often trying to regain control over what comes next. If the property no longer fits their life, the decision is not just whether to live there or sell it, but when and how those steps happen.
David explains that once you move into a property, the timeline starts to matter. Living there for a period of time may open the door to some primary residence benefits, but it does not reset the property’s history or guarantee full exclusions. Selling too soon can limit what is available. Waiting without a plan can do the same.
These timing issues are why some owners later look at a 1031 Exchange as a way to reposition into a property that better fits their long-term goals. The sequence of events matters. Whether you convert the property, hold it, or sell it, early decisions can shape the tax outcome years down the road.
Once you move into a property, your future options narrow. Once you sell without planning, some outcomes are locked in.
Making Informed Decisions After Divorce
David and Tom both emphasize the importance of understanding what you are stepping into. Receiving an investment property is not inherently good or bad. The outcome depends on how well your next steps align with your goals and with the tax rules that apply.
Living in the property can work, but only if you are prepared for the time commitment and the limits on tax benefits. Selling too quickly can leave value behind. Waiting too long without a plan can do the same.
Divorce forces decisions. Real estate decisions made under pressure deserve careful planning.
If you are navigating a divorce and deciding what to do with a property you received, contact Equity Advantage to speak with an expert and explore your options before taking the next step.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
