Recently, we worked with a client who wanted to 1031 exchange into a replacement property that was ideal for their exchange but had a purchase contract which stipulated that the home may be purchased for primary or secondary use but not income. The client wanted to ensure that there was nothing indicated in the 1031 requirements that might cause trouble down the road. In this scenario, is the replacement property acceptable as long as the client maintains his primary residence and uses the "secondary" residence less than six months out of the year?
Personal Use Requirements
In short, no. Your personal use should be minimal and your primary use should be for rental purposes. There is a safe harbor for properties in a rental pool that permits up to either:
- 14 days a year; or
- Up to 10% of the time it is actually rented out.
This tests only the first two tax years after the exchange is completed. See: https://www.irs.gov/pub/irs-drop/rp-08-16.pdf
It is best to purchase a replacement property that will be held primarily for business rental purposes in order to comply with the requirements of Section 1031.
- 1031 Hotline: If you have questions about personal use property in 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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