1031 exchange into early retirement

[Chris Taylor]

Hello. I'll try to keep this simple. We will be selling a rental this spring and wish to do a 1031 transfers into another property, as it has appreciated quite well and we would like to defer the tax. We plan to rent this new property for at least a year and then retire and use it our new primary residence (after selling our current PR). I understand that the safe harbor time period is 2 years, but this seems to be a bit of a gray area based on my reading. Is one full year of renting the property enough time to then recharacterize it as a PR, or will we be penalized and lose the tax benefits we thought we had?  Thank you! I have another question, but will keep it there for now!

[Dave Foster]

@Chris Taylor, Your absolutely right it is a gray area.  The safe harbor is there but it was actually first put into place as a mechanism to determine when you could depreciate a property and take expenses against income in a rental situation.  Along with the IRS dependency on "intent" as @Chris Mills said the safe harbor has expanded into one additional way to demonstrate intent.

Since you communicate with the IRS through tax filings a situation where you would purchase and rent in one year and rent some in the next year could be construed to mean that you rented it for two years.  That would satisfy at least one old revenue ruling.

But for this you want to rely heavily on your accountants opinion because they're the ones who can assess your situation for consistency and risk  tolerance and how aggressive you can be with this.  I've  seen everything from a few months to a year to two full years.  And depending on your move in schedule and necessary work to be done that can play into it as well since days you are working on the property are not counted as personal use.