1031 Exchange Coversion To Primary Residence?
Can anyone give me the current opinion on the guidelines regarding the conversion of a 1031 tax exchange property into a primary residence?
Scenario:
Investment property is relinquished. Replacement property is identified and purchased with intent to hold for appreciation as an investment. Property may or may not be rented at FMV to non-relatives.
Is there a holding period as an investment that must be adhered to? If so, is it in writing from the IRS?
Thanks.
I am going through this right now. This is what my attorney is telling me.
If you sell within 1 year the profit is taxed as regular income. If you hold for one year you pay 15% cap gains plus state taxes plus paying back whatever depreciation you have taken.
You can 1031 if you hold for 1 year or more. You have 45 days after the sale of the property to put a contract on something else and 6 mos. to close on it. It must be at least $1 more than what you sold the original property for. The profit from the sale must go directly into a qualified intermediary (escrow account) until you close on your new property. If you touch the cash at closing you cannot 1031 exchange at that point.
Thanks, but that is not what I am asking. Let me word it a little better.
I understand the 1031 process. If I do a 1031 and my replacement property is a single family residence that I intend to rent or hold for appreciation, at what point can I move into the replacement property and convert it to my primary residence? Is there a time period that one must hold as long as original intent is to rent or hold for appreciation?
It sounds like you want to eventually convert this property into YOUR primary residence and get the capital gains tax exclusion. If so, you obviously would have to live in it over 2 years. But the new recent law says your cannot sell it until you have owned it for 5 years.
Here is an exerpt from a doc I have written by Benny L Kass (that is my copyright disclaimer)
Section 641 of the American Jobs Creation Act of 2004 has imposed a five-year restriction.
The new law specifically states:
If a taxpayer acquired property in an exchange in which section 1031 applied, (section 121(d)) shall not apply to the sale or exchange of such property if it occurs during the 5-year period beginning with the date of the acquisition of such property.
What is not clear from the new law is how long after the five-year period the investor has to hold on to the replacement property before he can take advantage of the Section 121(d) exclusions. Can he sell it in year six, or does he have to use and own the property for two years after the new statutory five-year period? I suspect that the Internal Revenue Service will address this issue at some time in the future.
yes biophase is right, 5 yrs if doing 1031 into primary to avoid cap gains
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The question was how long must you use a 1031 replacement property for a qualified investment use BEFORE it can be converted to you primary residence.
The implied question is how long must the property be used for a qualified investment purpose so that a conversion to primary residence does not unravel the exchange.
Blueford already answered the question.
Here is the easy summary based on the example of exchanging out of relinquished property and into replacement and then ultimately converting into your primary residence with the intent to take the 121 exclusion:
1) You should rent and/or hold the replacement property for at least 12 months in order to ensure that your 1031 exchange qualifies; and,
2) You must live in the property for at least 24 months (2 years) out of the last 60 months (five years) in order to qualify for the Section 121 Exclusion election; and,
3) You must own the property for five years BEFORE any sale in order to qualify for the 121 Exclusion.
Items 1 and 2 are not new. The only change was the addition of the five year holding period, which was signed into law on 10/22/2004, and is effective for any properties SOLD after that date.
I would be happy to provide anyone with a link to our web site with the exact code, including the 10/22/2004 changes - just email me.
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I understand that the recommendation is to hold a property for which a 1031 has been accomplished for at least a year before converting to a primary residence. I also understand that there is no specific IRS regulation regarding this. If that is correct, how can IRS enforce the one year rule?
They are not enforcing a one year holding period, they are enforcing (during an audit) your INTENT to HOLD the property. As long as you can prove you had the INTENT to HOLD the property for rental, investment or use in a business (as opposed to holding it for sale, flipping, etc.) you will be fine. Holding it for 12 months or more makes proving your INTENT to HOLD very easy.
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