Using your S Corp - 1031 Exchange and Self-Occupy the Property?

Question

Hello all. Any help with a citation if possible would be greatly appreciated. That way I can pass off to clients. Property is located in NY. Will be exchanging for property out of state(FL). I am working with someone who is considering doing a 1031 exchange. The property is owned by the S-Corp that they are shareholders of. They are the only two shareholders(husband and wife). The replacement property they would like to buy is a 2family home. They would like to rent one unit to someone and then lease out the other unit themselves, and pay rent at fair market value back to their S- corporation. Will the IRS see a problem with this? And if so, why? If not, why? Any feedback is greatly appreciated. Thanks.

Johnny Borrelli · Answer

@Dave Foster thank you.

Dave Foster · Answer

@Johnny Borrelli, Kind of uncharted waters. There's just not much established consistent case law on something this narrow. Most case law always takes into account specific circumstances.

They and their S corp are two different taxpayers. But they and their S corp are related parties. An arms length lease with declared collected and taxed rent would be hard to argue with. And most states will not allow you to declare a house your primary residence if it is owned by a corporate entity. But

What might make this easy is if the value of 50% of the new property is equal to the value of what they sell. In that event they are using their 1031 to buy the investment portion of the new property. That would satisfy the requirements of 1031 completely. And also solve the issue of paying rent which then has to be declared as income and taxed. And it would keep all of their potential primary residence exemption option intact.

Using your S Corp - 1031 Exchange and Self-Occupy the Property?

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