Moved in to Investment Property for 4 month, can I still do 1031

[Puri Indah]

Hello all, I need your expertise on 1031 subject, in particular @Dave Foster :)

I bought an investment property, rented it for 5 years, moved into it for 4 months (thinking that I could live there) but changed my mind and now wanted to sell the property. Can I still 1031 on this?

Thank you for your feedback.

[Dave Foster]

No fair you take the easy part @Bill B.!! :) . And you're absolutely correct.  @Puri Indah can sell a SFR and buy a duplex living in half without paying any tax. As long as the amount of the duplex used for investment is at least equal to the amount of the net sale

The original question???  That's actually a fun one.  This one could go both ways very easily.

One one hand Puri says that they moved in.  That would make that house their primary residence.  And since it is their primary residence it's not eligible for 1031 treatment.

But on the other hand -The way we communicate with the IRS is through our tax returns.  It's possible that there has not been a tax return filed showing the change from rental to primary.  If there is then that's all she wrote.  But if not then according to the tax filings that property is still investment.

And if it is still investment then it is perfectly acceptable for the owner to use an investment property for some personal use.  The safe harbor of two weeks a year is only a safe harbor and is more geared to creating limitations on depreciation and deductibility of mortgage interest and expenses.  So is it conceivable that Puri was simply staying in their investment property for a time before deciding the re-rent or sell?  

Optically this one would probably be very hard to see.  But of course optics are not a justification to do something inappropriate.  But if the property has not been changed on the last tax return to reflect it's status as the primary residence.  And if the owner hasn't created a body of evidence demonstrating that the property is their primary residence - like homestead, voter registration, drivers license, etc.  And if the next tax return treats depreciation, mortgage interest and expenses correctly, I'm having a tough time saying that it's wrong.  

Puri, I'd say get your accountant on board and if they're OK with it you've got a good argument.