1031

The 10/2004 Tax Law changed the rules for sale of a personal residence acquired in a 1031 exchange.  The primary residence cannot be sold (tax free) for 5 years after its acquisition.  New Section 121(g).

DIFFERENT QUESTION:
I own a rental property. I want to sell it tax-free, buy a new rental property to eventually use as my personal residence/vacation home. How long do I have to wait before I convert its use?

I own a residence. I want to sell it tax-free, and buy a new property to eventually use as a rental. How long do I have to wait before I convert its use?

BACKGROUND:

Using §1031 for investment/rental property, you may sell the old property and buy a new property on a tax deferred basis. The new property must be US real estate used for investment or in a trade or business (rental). Neither the old nor the new properties may be personal use (primary home/vacation home) property.
For more information about §1031, see §1031

For more information about selling a residence, see Home Seller Tax Rules

Your intention at the time of the transaction is the only relevant fact; you can immediately thereafter change your mind and convert the usage of the property. However, since the IRS cannot look inside your head to see what your intention was, IRS will examine the “objective manifestations of your intent” to determine what your intention truly was.

For example, Bob owned a small apartment building. He traded (§1031) into a large single family home, held for rental. After buying the home, his personal circumstances changed and he wants to move into the property. How long does he have to wait?

Unless there is an outside, objective event (Bob married and his wife is expecting triplets) justifying a change in usage of the acquired property, I recommend waiting until  the Statute of Limitations has expired: generally 3 years from the date the tax return is filed, before converting the usage of the property.

• [If Bob acquired the new property in December, 1996, this means he does not convert its use until 3 years after filing his 1996 Income Tax Return.]

If Bob had the proper mental intention at the time of acquisition, he may change his mind any time afterward, if he can prove that his intention changed. The only way to prove this would be an external objective event: for example, the day after closing his §1031 transaction, Bob’s house burned down, so he moved into what would have been his new rental property.

Reminder:   The 10/2004 Tax Law changed the rules for sale of a personal residence acquired in a 1031 exchange.  The primary residence cannot be sold (tax free) for 5 years after its acquisition.  New Section 121(g).

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