1031 Rental to Rental to Personal Residence


B

bc

I have a question regarding like-kind exchanges:

If someone exchanges a residential rental property for
a better residential rental property with the intent
of eventually moving into the replacement property,
how long does the replacement have to remain rental
property before the owner can convert it to their
personal residence?

Thanks in advance.

bc
 
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D

Dick Adams

bc said:
I have a question regarding like-kind exchanges:

If someone exchanges a residential rental property for
a better residential rental property with the intent
of eventually moving into the replacement property,
how long does the replacement have to remain rental
property before the owner can convert it to their
personal residence?
The Tax Court has said that there really is no definitive
answer to your question because Section 1031 is based on
intent which means it's subject to a 'smell test.'

Dick
 
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Ed Zollars, CPA

bc said:
If someone exchanges a residential rental property for
a better residential rental property with the intent
of eventually moving into the replacement property,
how long does the replacement have to remain rental
property before the owner can convert it to their
personal residence?
As Dick noted, this is a smell test. But, theoretically, if
you always intended for this to be personal use property and
were only renting it as "window dressing" in order to get
1031 treatment, the answer would be that it didn't qualify
for 1031 treatment in the first place.

Similarly, theoretically if you really intended the property
to be a rental property, but the day after the exchange your
situation changed and you then moved into it as a personal
residence, it would still qualify for 1031 treatment.

That said, since a judge and the IRS generally are not mind
readers, the time period will normally be used to judge
whether or not your claim that you intended for it to be
investment or business property is plausible. Of course, if
other evidence (like your own statement--"I was told I just
had to rent it for a year then I could move in!") rathre
conclusively shows a different motivation, then the court
very well could ignore the rental time period issue and
instead decide the matter based on the other evidence.
 

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