Hello all, I need your expertise on 1031 subject, in particular @Dave Foster :)

I bought an investment property, rented it for 5 years, moved into it for 4 months (thinking that I could live there) but changed my mind and now wanted to sell the property. Can I still 1031 on this?

Thank you for your feedback.

One more question: If I 1031 exchange the property in question which is a SFR to a duplex, can I move in to one of the unit of that duplex? Or I have to rent both?

@Puri Indah

I’ll answer the easy 2nd part. Yes you can 1031 exchange in to a duplex and live in half, but the rentable half is the only cost that counts towards the exchange. (In other words your purchased property will probably have to be twice as expensive to fully defer taxes.)

@Dave Foster will have to answer the first question. I don’t like your odds, but it was less than a year and didn’t cross over a tax year, so MAYBE?

No fair you take the easy part @Bill Brandt !! :) . And you're absolutely correct.  @Puri Indah can sell a SFR and buy a duplex living in half without paying any tax. As long as the amount of the duplex used for investment is at least equal to the amount of the net sale

The original question???  That's actually a fun one.  This one could go both ways very easily.

One one hand Puri says that they moved in.  That would make that house their primary residence.  And since it is their primary residence it's not eligible for 1031 treatment.

But on the other hand -The way we communicate with the IRS is through our tax returns.  It's possible that there has not been a tax return filed showing the change from rental to primary.  If there is then that's all she wrote.  But if not then according to the tax filings that property is still investment.

And if it is still investment then it is perfectly acceptable for the owner to use an investment property for some personal use.  The safe harbor of two weeks a year is only a safe harbor and is more geared to creating limitations on depreciation and deductibility of mortgage interest and expenses.  So is it conceivable that Puri was simply staying in their investment property for a time before deciding the re-rent or sell?  

Optically this one would probably be very hard to see.  But of course optics are not a justification to do something inappropriate.  But if the property has not been changed on the last tax return to reflect it's status as the primary residence.  And if the owner hasn't created a body of evidence demonstrating that the property is their primary residence - like homestead, voter registration, drivers license, etc.  And if the next tax return treats depreciation, mortgage interest and expenses correctly, I'm having a tough time saying that it's wrong.  

Puri, I'd say get your accountant on board and if they're OK with it you've got a good argument.

@Bill Brandt : Thank you! Appreciate your feedback!

@Dave Foster : That was very helpful, Dave - thank you!
So per IRS, it should be fine I supposed since the next tax filing is not until April.
Would it matter for the bank/lender if they know that I lived in the place for a few months? I'm not sure if this would affect the loan.

@Puri Indah , If you attempt to get a conventional primary residence loan that would be a clear message to the IRS that you are not selling an investment property. If you try to get an investment loan and don't have a different primary residence they will certainly want to know the deal including where you will be living since investment lenders, especially private ones do not like to lend on . However a conventional FHA MF loan should be no problem since FHA recognizes that you are purchasing both an investment property and a primary residence should be no problem.

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Thank you so much both @Bill Brandt and @Dave Foster for your excellent advice and guidance! Very helpful that I can now follow the right direction.