1031 On Owner Occupied Rental Property
I am selling an investment/rental property and would like to do a 1031 exchange for another rental/investment property. I have occupied the rental property periodically in the past while fixing it up for sale and intend to do so on the replacement property.
The 1031 exchange company I contacted advised that while this is a like for like exchange it may not qualify for a 1031 under IRS rules because I have occupied the property. The IRS may consider it as a second home or vacation property. (I have never claimed it as a primary residence and always reported the income/expense as rental).
Hoping that someone can explain the test/criteria that the IRS would apply and or suggestions on how to structure the transaction so that I can do a 1031.
You have "occupied the rental property periodically??" If that got my attention, it would probably get the attention of the IRS. Do you have a primary residence that you have maintained during this periodic-rental-property-occupancy? If so, is that your address of record for tax returns? Have you had a consistant primary residence mortgage deduction on your tax returns?
These are the types of things the IRS would want to know.
How long have you owned the property?
How long have you had it in service as a rental?
How long did you occupy the property each year you had it in service as a rental?
Would you explain your statement: I have occupied the rental property periodically in the past while fixing it up for sale. Have you attempted to sell the property in the past?
Good questions;
I have not claimed this property as a principle residence at anytime. It has been reported as a rental. I rented it immediately after purchase and it has been rented continuously since. (4 years). I have occupied a portion of the property during the winter months during this time frame, but have maintained my principle residence elsewhere.
Thanks for the help
Thanks for the reply and I will take the suggestion to be careful to heart. I am still somewhat unclear what the IRS criteria are and if doing a 1031 in this case would be legitimate under IRS guidelines. If anyone has a understanding of the IRS rules and what test they may apply it would be great to hear from you.
Hello again. This is an excerpt from the book Selling Real Estate Without Payng Taxes (Dearborn Publishing):
"The first basic requirement of a valid exchange is that the property being exchanged and the property being acquired both be for business use or held for investment. The official code reads in part:
“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment”
As discussed previously, for real estate, the category of “for investment” is pretty broad, but remember primary residences, vacation homes, and second homes are excluded by implication."
That is the test the IRS will apply to see if you can do an exchange. You might want to by this book (Amazon.com). Good luck.