Rental Property 1031 Exchange Rules

1031 rental property

A client recently came to us with the following 1031 situation:

We have named a property in Edina, which is priced at $450k. We plan to rent it out at the beginning, and move in later. Our question is, how long do we have to rent out the house before we can move in and convert it to our primary residence, without the profit gain penalty?

No Clear Answer

That is a very good question, for which there is not a clear answer.

We know from the Internal Revenue Code that your initial intention (mental state) must be to hold the Replacement Property for productive use in a trade or business or for investment. It is okay to have an “indeterminate” long term intention as to what you may do with it much later. However, I would not say with 100% certainty that you will be able to move in to it as your home at this time.

The Code

26 U.S. Code § 1031 - Exchange of property held for productive use or investment

(a)  Nonrecognition of gain or loss from exchanges solely in kind 

(1)  In general

No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.

Holding Periods

There is not a bright line minimum time period that I can point you to. The safe answer is “The longer…the better.”  Two years of holding it for investment / business purposes may be sufficient for most taxpayers. Check with your CPA or tax adviser about your specific situation.

  • 1031 Hotline: If you have questions about 1031 rental properties and holding periods, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

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