Q:

Subject: Converting property acquired through a 1031 exchange to primary residence

 I have a rental property that I acquired through a 1031 exchange and would eventually like to move into it and make it my primary residence.  The exchange took place in July 2004 and the home is presently rented for a year.  Is there a specific period that you have to wait before we can make the conversion?  Do you know of any IRS tax case law or hearing decisions regarding these types of conversions?

A:

 There is no statutory length of time required before converting a rental home to personal use.  Obviously, the longer, the better because real life events go a long way in proving intentions.

There is now a five year waiting period for a home acquired via a 1031 exchange to be eligible for the Section 121 tax free gain of up to $250,000 per person.

What is most important in regard to a conversion from a rental to personal use is that this not be pre-planned at the time of the 1031.  The idea of making the conversion must arise after the new property has been used for the rental or business purposes that qualify it as suitable replacement property for the previously owned property.  If IRS were to learn that your intention at the time of acquiring the new property was to live in it yourself, they have the power to nullify the 1031 exchange and force you to pay the taxes on the original sales, plus penalties and interest.

Not that people don't plan these kinds of things out ahead of time.  The smart ones keep such plans to themselves and make sure all documents and witnesses can verify that any conversion plan arose well after taking title to the new property.  The stupid people shoot their mouths off about the plan, telling everyone of their intentions, and end up in deep doo-doo as a result. 

I hope this helps.

Kerry Kerstetter

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2005 03:51:00 PM Send this post: