1031 exchange( 2nd partial rental home)

3 Replies


I have a rental property I am planning to sell and use the proceeds to buy a 2nd home( through 1031 exchange). I know 2nd home use for personal use doesnt qualify for 1031 exchange. However my question is what if if I stay there as well as rent it out( like a duplex or mother in law unit for example)- would this qualify for 1031 exchange - This way I get best of both the worlds. Is it possible at all? Anything to be careful about? 

‘If you use the place for more than 14 days or more than 10% of the number of days it is rented -- whichever is greater -- it is considered a personal residence.“

@Pradeepan V. , You're not necessarily dead in the water yet.  @Bill Brandt is referring to the Safe Harbor of Rev Proc 2008-16.  This safe harbor does lay out some important tax treatment structures for how and when you can deduct mortgage interest, and take depreciation and offset expenses with income.  But what it does not do is give you a prescriptive check list for whether or not your property will qualify for a 1031 exchange.  As always the standard is your intent.  In Rev Proc 2008-16 the IRS is simply saying they will concede your intent if you meet that fact set.  There may be other ways in which you can demonstrate your intent outside 2008-16 including the actual number of days it is rented vs your personal use.  Efforts made to secure renters, and a whole host of other ways.   But whatever you do you are going to have to stop thinking of it as a 2nd home and start thinking of it as an investment property you may use for some personal use.  

And BTW - a 2nd home loan criteria usually will not restrict you from having an investment intent.  But a 2nd home loan that still allows you to treat the property with investment intent can offer advantageous terms compared to a regular investment grade loan. 

Keep an eye on my personal blog here at BP.  Theres actually an article going up on this very issue.  Maybe even today.  So kudos on a very timely question.

Thanks Bill and Dave. My question is what if I rent as well as use it for my personal use?  BOTH and not one vs the other simultaneously( rent one portion and live in another). So my intent is to use for my personal use as well as rent it out. So I do get rental income 365 days but also live there 365 days. 

Dave - I will look for your article.