Period before place replacement in service?

Question

The period of renovation after you do a 1031 exchange---if you don't place the investment property in service for six months and start your depreciation at that time why isn't that period of time counted as residential months?

I've moved in my 1031 and establishing residency,  I realize the 1031 has to be held 5 years if you take the capital gains exclusion but how do you count the months of rehab before you place the investment property in service? Can those months possibly be residential?

Lynn Z · Answer

I'm OK. I rented it two years over two tax periods.  In addition to the five year holding you now have the 2008 housing act requiring no rental past Jan. 2009 if you want no subtractions due to the new formula subtracting nonresidential use.  After 3 1031's rolled into this house the depreciation recapture is, of course, terrible.  At least I can ease the pain on the capital gains which will be going up as well. I just want to get off the 1031 roulette wheel.

Dave Toelkes · Answer

There is no set timeframe for placing a property that was acquired via a 1031 exchange into service as a rental.  Indeed, there is no requirement to ever put a 1031 replacement property into service as a rental.
          
          All that is required to validate the exchange is that the property be held for investment use and not immediatedly converted to personal use.
          
          Moving into the property and establishing it as your primary residence puts your exchange in jeopardy.