1031exchange into 1 high end rental.

[Jeremy Mulvey]

Well the time has come to sell my flip/lease option(my strategy now would have me keeping it as a rental but its a been on a lease option so its not gonna happen). It qualifies for 1031. I found a great rentable house in a desirable neighborhood that I will be paying pretty much full value for and the timing will work out perfectly to take advantage of this 1031. I will be transitioning about 70k in proceeds into the new home worth 270k and of course this includes my rehab costs that I won't be able to take out. Now this leaves me with some decent cash flow in the new house and what will hopefully be a high end renter thats gonna take care of the place. Now some may call this a bad play in regards to building a rental business. But I'm big on location and equity growth plus buying rentals that I would live in. My plan would be to take out a HELOC to use for future buys. Am I focusing too much on making this 1031 work? One option if i didn't 1031 would be to move into the new home and rent my current home to get a better rate on the loan. Any advice on this situation for someone who would like to build a large rental business?

Thanks!

[Dave Foster]

@Lap Ku, Great question - There's no prescriptive statutory period.  The true answer is - long enough that you have demonstrated your intent to hold for productive investment use.

There's two extremes - If you completed your 1031 and moved in immediately you obviously did not buy it with an intent to hold for investment.  Conversely if you completed your 1031 and then used it as a rental for several years you have obviously shown your intent to hold for investment and could move in at any time - changing your intent.

There is a  safe harbor from the IRS at two years in Rev proc 2008-16.  But that doesn't address the minimum.  Many folks feel good at more than a year because at the very least it places the property on your schedule E for two consecutive tax returns. 

It's all about how you would demonstrate your intent.