Can You Live in a 1031 Exchange Property and What Are the Rules

Author

Reads 1.3K

Top view of white vintage light box with TAXES inscription placed on stack of USA dollar bills on white surface
Credit: pexels.com, Top view of white vintage light box with TAXES inscription placed on stack of USA dollar bills on white surface

Living in a 1031 exchange property can be a bit tricky, but it's definitely possible. You can live in the property, but there are some rules you need to follow.

The property must be your primary residence for at least two years before you can use the 1031 exchange rules. This is a key requirement to ensure you're not using the exchange for personal gain.

You can't rent out the property for more than 14 days per year or use it for business purposes without jeopardizing the exchange. This means you'll need to be mindful of how you use the property to avoid any issues.

The IRS allows you to live in the property, but you can't use it as a vacation home or rent it out for more than 14 days without losing the exchange benefits.

Eligibility and Planning

To successfully defer capital gains taxes, you need to carefully plan your 1031 exchange conversion.

You'll need to take important steps, including planning to convert your replacement property to a personal residence.

Careful and strategic planning is required to defer capital gains taxes.

You should consider the tax implications of converting your replacement property to a personal residence.

Living in the Property

Credit: youtube.com, Can you do a 1031 exchange on a property that you used to live in?

You can move into your 1031 exchange property after holding it for at least two years, but only if you initially acquired the property for rental or investment purposes.

In certain life-altering circumstances, you can show the IRS that it's suitable or necessary to move into your rental property and make it your principal residence, including unexpectedly losing your job, becoming disabled, getting divorced, severe injury or health condition, getting married, or taking in an elderly parent or loved one.

To convert a rental property into a personal residence, you'll need to document your reasons and keep any paperwork that the IRS may need to confirm your justifiable exception.

You can move into your exchange property after the 24 months following the 1031 exchange, but this only applies to single-owner properties; beneficiaries of Delaware Statutory Trusts can't move into their 1031 property.

To take advantage of the Section 121 exclusion, you must live in the property as your primary residence for at least two out of the last five years before selling.

Here are the life-altering events that may justify converting your 1031 property into your principal residence:

  • Unexpectedly losing your job
  • Becoming disabled
  • Getting divorced
  • Severe injury or health condition
  • Getting married
  • Taking in an elderly parent or loved one

Tax Implications

Credit: youtube.com, Convert 1031 Exchange Property to Primary Home

Living in a 1031 exchange property can have significant tax implications.

You may be subject to capital gains tax on the appreciation that occurred before the conversion if you sell the property in the future.

Depreciation recapture can also apply if the property was previously used for rental or business purposes, resulting in additional tax liabilities.

Failing to comply with IRS regulations regarding the conversion of a 1031 exchange property into a primary residence can lead to penalties and potential tax liabilities.

It's essential to meticulously follow the requirements to avoid possible consequences, including penalties for non-compliance.

Check this out: Tax Benefits of Reits

Conversion and Occupancy

You can move into your 1031 exchange property after holding it as a rental for at least two years. This allows you to avoid paying capital gains taxes on the sale of your previous property.

To qualify, you must rent the property out at fair market value for at least 14 days during one of the two years of ownership. This rental agreement must be documented in writing.

Credit: youtube.com, Convert a 1031 Exchange Property to a Primary Residence

Renting the property for at least 14 days during one of the two years of ownership is just one of the requirements. You can't use the property for personal purposes for more than 14 days or 10% of the total number of days you rented it out within 12 months.

The IRS has established these rules to ensure that you initially acquired the property for investment purposes, not to live in it. If you don't follow these guidelines, you risk an exchange challenge from the IRS, and your capital gains may be taxed.

Here are the specific rules to keep in mind:

  • Rent the property for at least 14 days during one of the two years of ownership.
  • Document the rental agreement in writing.
  • Keep records of rental agreements, tenant communications, and maintenance.
  • Don't use the property for personal purposes for more than 14 days or 10% of the total number of days you rented it out within 12 months.

After holding the property as a rental for two years, you can safely move into your property and declare it a principal residence.

Frequently Asked Questions

Do you have to rent out a 1031 exchange property?

To qualify for a 1031 exchange, you must rent out the property for at least 14 days per year, with some personal usage allowed. However, the specific requirements for personal usage and rental periods vary, so it's essential to understand the details of a 1031 exchange before proceeding.

What is not allowed in a 1031 exchange?

A 1031 exchange does not qualify for like-kind exchange if the property is held primarily for sale or if personal or intangible property is exchanged. Additionally, exchanges of personal or intangible property are no longer eligible under Section 1031.

Matthew McKenzie

Lead Writer

Matthew McKenzie is a seasoned writer with a passion for finance and technology. He has honed his skills in crafting engaging content that educates and informs readers on various topics related to the stock market. Matthew's expertise lies in breaking down complex concepts into easily digestible information, making him a sought-after writer in the finance niche.

Love What You Read? Stay Updated!

Join our community for insights, tips, and more.