When you do a 1031 exchange you need to acquire a replacement property that's like-kind. The definition of like kind in the realm of real estate is very broad. A lot of people that have been holding single-family rental property (a small duplex or fourplex) may be inclined to buy a property as a replacement that eventually could be converted into a personal use property such as a second home. Here are some things to keep in mind when converting rental property into personal use property.
Qualifying Purpose
You need to be very careful that when you receive the replacement property you have the requisite intent to hold it for a qualifying purpose of investment or business use.
Sometimes people will buy a property that is a vacation type property and put it into a rental pool and predominantly they're using the property as a rental property with incremental tenants. Now the taxpayers that have acquired this vacation property may be inclined to use it for personal use. Under a safe harbor that the IRS has you can use it up to 14 days a year or up to 10% of the time the property is actually rented.
IRS Guidelines
The IRS can test each of the two years after you acquire that replacement property to see if your personal use was within those guidelines. By the way if you go and use the property but you're there predominantly to maintain the property (to repair it, paint it, or fix it) then those periods that you're there for business would not count against your 14 days or 10% that you use it for personal use.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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