Second home vs investment property and 1031 exchange

[Son N.]

Hello,

I bought a condo (paid cash) near the bottom in 2010 and its current market value is quite good. My parents have been staying there rent-free but they have a new place and so we want to consider doing a 1031 exchange. Can I do 1031 exchange without renting it out first? If I rent it out, how long should I do it (i.e. IRS tax filing as a rental)? Is 1 year enough? Thanks for any guidance.

[Dave Foster]

@Son N., Without documentation that the property has been held for investment it would not qualify for 1031 treatment.  Your parents have been living there but in order to qualify for sec 121 it must be your primary residence so screw the 121 it won't qualify and you'll end up really screwed :)  

There is a safe harbor in Rev Proc 2008-16 that establishes 2 years as adequate.  However there's a ton of folks out there that feel and act that anything over one year is fine (reported on two tax returns).

you may want to think about setting it up as a rental for your parents.  Actually do a lease and charge, collect, and report market rent.  You can always use legal means to gift back that rent to them while at the same time establishing the property as investment without displacing them.