Posted by Lynn on August 09, 2004 at 07:15:20:
I believe William or Garrett has posted your answer in the archives. I looked, but I could not find the specific answer to your question. Lynn
converting 1031 exchange into a primary residence - Posted by Mike
Posted by Mike on August 04, 2004 at 18:41:01:
I have just completed a 1031 exchange on my only rental property. My wife and I still have our primary residence. Can I sell my primary residence this tax year and move into the newly acquired 1031 exchanged property? We only own the two homes. Would I be better off to wait until January 2005 to sell my primary residence, so I do not have two real estate sales in the same tax year?
converting 1031 exchange into a primary residence - Posted by Dave T
Posted by Dave T on August 16, 2004 at 24:17:19:
A 1031 exchange is only available for investment use or business use property. Acquiring your primary residence by means of a 1031 exchange is not permitted by the tax codes.
Since you have already completed an exchange, you must demonstrate your intent to use your replacement property for a qualified investment use or the IRS can disqualify the exchange. How long you must use your replacement property for an investment purpose is not defined in the tax codes.
I suggest, instead, that you use the related party rules as a precedent here. The related party rules for an exchange mandate that the replacement property acquired from a related party in a 1031 exchange must be used at least two years for a qualified investment purpose.
If you use your replacement property for a qualified invesment use for two years, I suspect that you will have adequately demonstrated investment use of the property and you should be free to convert it to your primary residence without any adverse tax consequences at that time.
Whether you should sell your current primary residence now might be dictated by other factors not related to the exchange. By the way, if you meet the two year rules to qualify for the capital gains exclusion on your current primary residence, a sale is not reported on your tax return unless your profit exceeds the capital gains exclusion.