Converting 1031 exchange to primary possible?

[Peter Morgan]

Hello,

I am considering doing a 1031 exchange on an investment property that I have and would like to know if there is a possibility to convert it into a primary at a later time? What would be the tax consequences. Appreciate your inputs.

Thanks

[Dave Foster]

@Peter Morgan, Yep, asked a lot because it is a great strategy to keep the tax deferred but use it to actually buy a primary residence for yourself.  It just takes patience.  the 1031 exchange is the sale of investment property followed by the purchase of new property you intend to hold for productive investment use.  You can always change your intent and then later move in and convert it to your primary residence.  This would not be a taxable event.  But you do have to be able to demonstrate that it was your intent to hold the new property for investment and not to simply move in.

There's no statutory holding period to do that.  But there is a safe harbor from the IRS at 2 years.  And the specific circumstances might allow for a shorter period before conversion. 

Like @Bill B. said, the conversion not only continues to defer the tax.  It allows you to use it in your next primary residence.  And when you die your heirs will get the property stepped up in basis so the tax disappears.  

Wonderful strategy if you can be a little patient.