Outside the box 1031?

Question

Is it possoble to sell a rental house and 1031 into a str and then also move into the str and have it be your primary residence?

Dave Foster · Answer

@Mike Fleener, A conversion like that is easily accomplished and. an be an incredibly powerful move for you.  The key is that you are "converting" an investment property into your primary residence.  The rules of 1031 require that your intent when you do your 1031 must be to hold the property for investment use.  During that holding time some personal use of the property is perfectly fine.  Once you have held it for investment long enough to have established your intent then you simply move in, change where it is reported on your tax return.  The conversion is not a taxable event.  And if you live in it long enough so that you have owned it for 5 years and lived in it for 2 out of the 5 years prior to sale you can even prorate the amount of gain in a sale between the period you lived in it (tax free to the sec 121 limits) and the period it was rented ( you pay this tax and recapture depreciation).  Still a great opportunity.

However, there is no statutory holding period.  The 2 years mentioned above is a "safe harbor" from the IRS in Rev Proc 2008-16.  And is also accompanied with some use and rental requirements if you want to take advantage of the safe harbor.  It's not that simple.  thankfully case law over the years has created a window with this 2 years generally seen as one extreme.  It truly is about your intent and how you can demonstrate that.  Most folks feel that a holding period of anything more than a year will satisfy.  Again, nothing magical about that number either.  It's more about how many tax returns it is reported on, which returns the purchase and sale and conversion are on, and facts of your situation that demonstrate your intent.

Mike Fleener · Answer

Thanks to the both of you, I've got some thinking to do

Jeff Nash · Answer

It can be done, but your motivation and intent when you sell the property can't necessarily be for eventual personal use, and the replacement property must be used for investment purposes for a period of time, which is 2 years or more.  There are some other considerations as well.  Feel free to reach out to me and/or I can refer you to my wife Whitney who is a qualified intermediary at Above & Below 1031.