Personal Use Rules in a 1031 Exchange of Real Estate

Personal Use Property

Recently, we worked with a client who wanted to 1031 exchange into a replacement property that was ideal for their exchange but had a purchase contract which stipulated that the home may be purchased for primary or secondary use but not income. The client wanted to ensure that there was nothing indicated in the 1031 requirements that might cause trouble down the road. In this scenario, is the replacement property acceptable as long as the client maintains his primary residence and uses the "secondary" residence less than six months out of the year?

Personal Use Requirements

In short, no. Your personal use should be minimal and your primary use should be for rental purposes. There is a safe harbor for properties in a rental pool that permits up to either:

This tests only the first two tax years after the exchange is completed. See: https://www.irs.gov/pub/irs-drop/rp-08-16.pdf

It is best to purchase a replacement property that will be held primarily for business rental purposes in order to comply with the requirements of Section 1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Meet Jeff

jeff peterson - 1031 expert

Jeffrey Peterson is the president of CPEC1031, LLC. He received both his B.A. and his J.D. from the University of Minnesota, and is a member of the Minnesota State Bar Association and the Tax Section of the American Bar Association.

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