Rent Section 1031 Exchanged Property to Self

6 Replies

I have read that if you charge reasonable rental and treat the tenant as you would any other tenant, you can possibly rent a property you exchanged into to a relative. Could you rent the property to yourself? I have someone asking me that question, and I haven't been able to find an answer. I know about loss limitations on self-rental, and I know the intent is that the new property is supposed to be an investment property, but I don't know if the self-rental is strictly forbidden and would void the 1031 exchange. Could it still be called an investment property if you are renting it to yourself?

@John Pless

I see you're a CPA too...

Why Schedule C? It's it's long-term rental real estate shouldn't it be on Schedule E?

An individual cannot take personal, nondeductible expenses (e.g. their own personal housing) and convert them to tax deductible expenses through a scheme or structure.  IRC Sec 280A(a).

Self rentals in the tax world are usually thought of as rentals that a taxpayer owns directly, or through a controlled entity, rented to another operating entity that the taxpayer controls. Think an office building owned by the taxpayer in an LLC taxed as a disregarded entity, leased to the taxpayer's P.C. dental practice taxed as a C-Corp. These have special rules associated with them but are usually respected by the IRS. The primary goal in these situations is asset separation and asset protection.

@John Pless

Also in this fact pattern the taxpayer risks the IRS voiding the 1031 exchange as the property exchanged into must be held and used for investment. A personal residence doesn't count. Nor does a house used as a personal residence but made to appear as a rental through a structural scheme.

Substance over form...

Thank you, Eamonn. Substance over form. I actually have a self-rental that is considered a Schedule C because it is equipment rental, so that is why I was thinking about that. I don't do this lady's return. One of those freebie ask me for bad advice kind of things. I appreciate your answers.

@John Pless , Yep substance over form. But there's an additional risk here.  Although audit risk in general is low you gotta believe that if audited her returns would be strip searched to find discounted or "undeclared" income.   Lot's opportunities for fortunate accidents.  Even with a disregarded but related entity.