Sometimes people want to do a 1031 Exchange into a property that they plan on immediately occupying as their home. As we've discussed before, they would have to treat the replacement property as either:
Business property,
Property used in my trade,
Or as investment property.
In this example, the exchangor hopes that the personal residence goes up in value. But is this considered an investment?
1031 Tax Court Case on 1031 Property Exchange of Lake Cabin
In a case called Moore vs. The Commissioner of Internal Revenue, a similar question was put before the tax court. A person was trying to do a 1031 Exchange from a second home lake cabin into a bigger, better second home lake cabin. The taxpayer in the case said, you know that this is a scarce commodity, and I anticipate that it will go up in value. I hope it goes up. The taxpayer was trying to make the argument that, even though it was his second home, his lake cabin that he never rented out, never advertised as a business property that it was still held for investment, so that it should qualify for 1031.
Hoping For an Increase In Value on Your Personal Use Property is not an Investment for 1031 Purposes
The tax court did not buy this argument. They said yes, everybody hopes that their primary residences and second homes go up in value. But, we really need to look at how you use the property to decipher what your intention was:
Was your intention primarily to use the property for recreational and personal use or,
Was your intention to hold it for investment?
These two intentions seem to be diametrically opposite to the IRS’s way of thinking (and their litigation position in the Moore case).
1031 Lesson Learned - Do Not Hold Primarily for Personal Use
Under the facts of the Moore case, the taxpayer was found to primarily hold the property for personal use…and the exchange failed. So, getting back to our question, Can I call my replacement property home/personal residence an investment, especially if I move into it immediately after I have completed my exchange? The answer is probably, no. That would probably not qualify because your use as your home is antithetical, completely opposite to use in one's business, use in one's trade, or holding for investment.
A Better Plan
If you are looking for help with your 1031 exchange of real estate, look no further! CPEC1031, LLC has over two decades of experience facilitating like-kind exchanges under section 1031 of the IRC. Contact us today to learn more about the process and how we can help!
Start Your Exchange: If you have questions about eventually converting your replacement property into a personal use type property in Minnesota, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
© 2017 Copyright Jeffrey R. Peterson All Rights Reserved