Help with 1031 exchange question

[Mike Lynch]

Hi,

I realize that I cannot exchange investment property for a Personal Residence.

I was told that I can do a 1031 exchange for a rental or business property.

For instance: What if I purchase a "Bed and Breakfast" or campground with owners residence and live there, or purchase a home, live in that home and operate my plumbing company from that home?....... Am I allowed to live and work in my business to avoid capital gains tax? I am not trying to pull one over on Uncle Sam. I honestly want to live in my property and operate my plumbing company so that I do not need to purchase 2 properties. 

Thanks?

[Dave Foster]

@Clayton Mobley, as my wife says, "Thank heavens theres only one".  Thanks for the shout out.  @Mike Lynch, You're not off track.  There's a myriad examples of mixed use properties that are counted as investment where there is a residential component.  The family farm, a BNB, Self storage with 24 hr access, etc.  On the other hand there's also income exemption when a primary residence generates some income within a shared space. and of course the oft used and as often hated home office exemption.  The question is really going to be "where does your situation land?"  The specific facts and circumstances set is what will be looked at upon audit.  In all circumstances there will be a reasonable and clear demarcation between personal residence of the owner and the investment use property

If you did a 1031 exchange in to a really nice house with an office in one of the spare rooms and claimed that it was as an investment property running your business the optics really don't justify that do they?  There's plenty of room to maneuever but do it looking in a mirror.

1.  If the property you purchase has multiple units or land that can be separated from the dwelling structure on it then it's relatively easy to make an allocation between investment and personal use as others have said.  Use the 1031 to purchase the investment allocation.

2. If the property is really residential and you're trying to justify a business use tread carefully.  By the way it's not only the ire of the IRS that will get you but local zoning and use laws.

3. If you find the perfect property that you could live in and run your business out of but the optics aren't quite clear then simply don't move in for a year or two.  Once your 1031 intent has been met you could then move in and have coffee with your pvc pipe every morning.