Turning a 1031 into primary residence

[Andrew DeShong]

I'm looking into moving into a new house.  What happens if I sold s rental then 1031d a house and rented the new house for a year them moved in? Would I owe capital gains after I moved in?

[Amanda Breck]

A 1031 exchange defers the capital gains tax for investment properties. Turning the investment property into a principal residence is possible, but you cannot immediately move into the property without sustaining the capital gains tax liability. There are very specific conditions under which you can live in real property acquired through a 1031 exchange while still deferring capital gains taxes on the sale proceeds. The conditions involve the intent and use of the property. 

Essentially you need to be able to show and prove your intent to treat the property as an investment property. The IRS considers your intent at the time of the exchange. Circumstances change, and that does not necessarily invalidate the exchange, but you will need to have documentation of your investment intent at the time of the exchange and any reasons for the change in use. It is a safer practice to have the property used for investment purposes for two years after the exchange to be safe. This isn't an explicit IRS rule, but two years is the general recommendation and what seems to work for the IRS.

The IRS considers the taxpayer’s intent at the time of the exchange. Circumstances change sometimes and the property originally acquired for investment purposes is later converted for personal use. The conversion does not necessarily invalidate the 1031 exchange. However, it is crucial to document the investment intent at the time of the exchange and any reasons for the change in use.



The IRS considers the taxpayer’s intent at the time of the exchange. Circumstances change sometimes and the property originally acquired for investment purposes is later converted for personal use. The conversion does not necessarily invalidate the 1031 exchange. However, it is crucial to document the investment intent at the time of the exchange and any reasons for the change in use.