Case
Study 2: Moving into 1031 Exchange Property
Waiting
Period to Move into 1031 Residential Investment Property
One of the most frequently asked questions is, "I'm planning
to exchange into residential investment property. Once I buy
the property how long do I have to wait until I can move into
it?" There are two answers: "No one knows,"
and "Longer is always better."
Kim's
Unforeseen Life Changing Event
Kim (not her real name) was living in Southern California
and completed an exchange for property in Washington that
she had a renter for. Kim expected to rent out the property
for five years then possibly move into it herself. Five days
after closing Kim was laid off her job of 15 years. Her California
residence was already listed for sale. Kim wanted to know
if she could move info her rental property without losing
the tax deferred benefit of her 1031 property exchange.
The
Tax Code is Silent. This is one of many areas where the
1031 exchange tax code is "silent" on subjects we'd
like answers to. In these cases we look at what we do know.
Replacement property for a 1031 exchange should be property
that the exchanger INTENDS to hold for investment. In other
words, "like-kind" treatment to investment property
being sold. The keyword is INTENDS. The code doesn't stipulate
the time period.
Converting
the Nature of the Use of the Property
Most tax preparers advise waiting twelve months or more before
moving in, although, we've had many situations where it has
happened earlier. It's called "converting the nature
of the use of the property." Arguable justifications
for conversion periods of less than one year are things that
would be considered "life changing events" such
as unemployment, drastic change in heath, or the property
was not rentable.
Kim's
accountant concluded that being laid-off was an unforeseen
life changing event that should justify converting her new
property into her residence at this earlier time period.
Does
intending to move into a property in the future disqualify
an exchange? NO! You may intend to move in. However, it's
just one of your options. For example, if you won the lottery
right away you'd probably buy a nicer home. We're allowed
to freely move in and out of any property that we own. The
taxpayer would not have thought it an issue if they decided
to move into their original rental instead of selling it.
That is fine. We just stop having rental income and no longer
enjoy any depreciation deduction while we are living in it.
The IRS
knows people do change the nature of their use of property
and, as far as we know, they have not challenged any taxpayers'
1031 conversion. Our best advice is still "longer is
better"
Additional
case studies:
[Partial 1031 Exchanges] [Minimum
Period to Own Exchanged Property]
Talk to
an exchange facilitator today
for specific answers about your situation.
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