Atlanta Deferred Exchange
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Atlanta Deferred Exchange

Can I convert my 1031 replacement property into my primary residence?

Q:  A year ago, I purchased a rental house as my replacement property in a 1031 exchange.  I have been unable to rent it and recently lost my job.  Can I move into it and still have a valid exchange?

A:  Under a 1031 exchange, a replacement property must be held for investment or use in a trade or business to be qualified property.  Assuming you purchased your rental property as an investment with the full intent of leasing it, you may be able to move in without invalidating your exchange.  (There is no stated holding period in IRS guidance; however, the length of this period is considered -along with other factors- when determining the taxpayer's intent.)

In a recent case, Reesink v. Commissioner (TC Memo 2012-118), the taxpayers prevailed even though they moved into their replacement property 7 months after acquiring it due to a series of financial setbacks that led them to sell their home.  Ultimately, the case came down to the taxpayers' intent: did they really purchase the single-family home and adjacent lot as an investment or as a soon-to-be personal residence? The taxpayers were able to successfully show that they had marketed the property for rent and shown it several times without success, while also establishing that their changed financial circumstances had led them to sell their home years earlier than they had planned.  The sale of their personal residence had not even been contemplated at the time they purchased the investment property.

Though this case failed to set definitive guidelines, taxpayers would be wise to document all efforts to lease replacement property and anything else that clearly establishes their intent to hold a property as an investment.