1031 Exchange it No?

[Cedric Van Duyn]

Hey BP Community, We have a home that has been in the family and has not been declared as a rental for tax purposes due to various family members and friends living in it. It has come time to sell, and the question is whether or not we need a 1031 Exchange in order to avoid Capital Gains Tax? Thank you so much for any help!! Cedric

[Dave Foster]

@Cedric Van Duyn, I'm not sure that's the right question.  I think the question is "Does this qualify for a 1031 exchange.  That's the only way you're going to shelter capital gains because as described the property does not qualify as your primary residence.  You (the owner) must reside in the house for 2 out of the 5 years prior to sale to get the sale tax free.

Unfortunately you're also on the bubble for a 1031 without some clarification of intent.  If you owned that house so that friends and family had a place to stay that is not productive use in business investment or trade and would not qualify for 1031.  If you bought that house to use productively as an investment whether for rent or appreciation or business marketing etc then the property would qualify for 1031.  The fact that it's not reported on your Schedule E makes establishing the investment intent sketchy for sure but not a statutory requirement.  Not that you couldn't have had the intent of appreciation but the IRS doesn't like inconsistency.  Tough call.