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Converting Rental Home To Personal Use
Q:
Kerry,Outstanding website! I have a slight variation on the 1031 Holding Period question.
We moved from the East Coast to the Midwest in 2000. At that time, we decided to rent out our East Coast condo. We rented it out until we sold it in 2004 and did a 1031 Exchange due to the huge appreciation. In August 2005, we will have rented out the replacement property for 1 year (actually 10.5 months with 1.5 months needed to get it rented).
Is there substantial risk in moving into this property at this point? (I've come across the 1-year vs. 2-year arguments). Since we have another house in this same town that we are currently living in, we thought of simply moving into the replacement property and turning our existing home into a rental. It's slightly smaller and in an area easier to rent out. Does having consistent rental property income on a tax form look better?
Thank you very much,
A:
There is no hard and fast rule or law regarding how long you have to use the replacement property as rental before you can convert it into your own residence without voiding out the 1031 exchange. What is critical is that, at the time of the acquisition, the intended use of the property was for rental and there was no preconceived plan to convert it into personal use.
The problems with these kinds of situations arise when the taxpayers are blabbermouths and go around telling everyone of their plan to acquire replacement 1031 property with the goal of converting it to personal use. As I've said many times, if that is your ultimate plan, keep it to yourself. Telling others about it will come back to bite you in the butt if IRS were to ever look into it.
As I've mentioned on several occasions, the only current hard and fast time requirement has to do with how long you must own the property in order to qualify for the Section 121 tax free exclusion of up to $250,000 per person. That is five years, starting from when you acquired the home in the 1031 process.
If there is no documentation showing that you had a plan back in 2004 to ultimately move into the new rental home, and everything shows that such a decision came well after that time, you should be okay to do that.
I hope this helps you understand the rules. Good luck.
Kerry Kerstetter
Labels: 1031
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/02/2005 01:16:00 PM Send this post:
