Can I use 1031 exchange when the house is occupied by a dependent?

Tax, SDIRAs & Cost Segregation
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Can I use 1031 exchange when the house is occupied by a dependent?

Julie Garner
Member since 2023 · 40 posts · 44 votes

Hoping this is in the right place.


Bought a house ten+ years ago, lived in it ~3 years, rented to the worst sort of people whom I had to evict, rented to my parents a couple of years, once I had a decent nest egg, no rent was charged.   Mother is now my dependent (father deceased) and need to move her near me.  I think I'll financially do very well selling this house rather than renting and should net about $325k.  My question is: Can I avoid capital gains on that if I buy her another house?  Would I have to show rent to do so?  I'm in a horribly high tax bracket and trying to figure out the best way to finagle this.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
2y

@Julie Garner, The house must be held with an investment intent in order to qualify for a 1031 exchange.  Renting at an arms length transaction to a related party is generally OK.  But a discounted or no rent situation for a related party is many times looked at a a personal property rather investment property.  The IRS wants to see a profit motive.  So a lease with declared rents would be a good thing.  

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @Julie Garner, The house must be held with an investment intent in order to qualify for a 1031 exchange.  Renting at an arms length transaction to a related party is generally OK.  But a discounted or no rent situation for a related party is many times looked at a a personal property rather investment property.  The IRS wants to see a profit motive.  So a lease with declared rents would be a good thing.  

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  • Julie Garner
    OP
    Member since 2023 · 40 posts · 44 votes
    2y

    Thank you. Dave.  Looks like in order to be compliant, I will be eating the capital gains :-(.

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    2y
    Quote from @Dave Foster:

    @Julie Garner, The house must be held with an investment intent in order to qualify for a 1031 exchange.  Renting at an arms length transaction to a related party is generally OK.  But a discounted or no rent situation for a related party is many times looked at a a personal property rather investment property.  The IRS wants to see a profit motive.  So a lease with declared rents would be a good thing.  

    Dave did not tell you that you did NOT qualify. He told you that it may be difficult to protect your qualification for an exchange if challenged by the IRS. 

    Difficult but not impossible. For example, if the house has been appreciating significantly but it was economically risky to rent it, then maybe you can make a reasonable claim that placing your dependent in the house had primarily a motive of protecting your investment - if indeed it was the case.

    These situations should be explored with an experienced real estate accountant.
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    Exactamundo @Michael Plaks.  And I doubt if you've filed 2023 tax return yet.  Who knows what could go on that return @Julie Garner

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  • Julie Garner
    OP
    Member since 2023 · 40 posts · 44 votes
    2y

    Thanks.  I don't usually file until April ;-) and will talk to my accountant.  

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