Replacement Property

How Much Personal Use is Allowed after 1031 Exchanging into Rental Pool Replacement Property?

How much personal use, and business use (for repairing and maintaining) is allowed after 1031 exchanging into a rental pool replacement property?

Maintaining vs. Improving

Any day that you spend working substantially full-time repairing and maintaining (not improving) your property is NOT counted as a day of personal use. Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day.

Additional Resources

Here are some additional resources on this topic:

Be sure to talk with your CPA or tax accountant about your specific situation.

  • Start Your 1031 Exchange: If you have questions about personal use when it comes to replacement property, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Personal Use Rules in a 1031 Exchange of Real Estate

Personal Use Property

Recently, we worked with a client who wanted to 1031 exchange into a replacement property that was ideal for their exchange but had a purchase contract which stipulated that the home may be purchased for primary or secondary use but not income. The client wanted to ensure that there was nothing indicated in the 1031 requirements that might cause trouble down the road. In this scenario, is the replacement property acceptable as long as the client maintains his primary residence and uses the "secondary" residence less than six months out of the year?

Personal Use Requirements

In short, no. Your personal use should be minimal and your primary use should be for rental purposes. There is a safe harbor for properties in a rental pool that permits up to either:

  • 14 days a year; or

  • Up to 10% of the time it is actually rented out.

This tests only the first two tax years after the exchange is completed. See: https://www.irs.gov/pub/irs-drop/rp-08-16.pdf

It is best to purchase a replacement property that will be held primarily for business rental purposes in order to comply with the requirements of Section 1031.

  • Start Your 1031 Exchange: If you have questions about personal use property in 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Property that Doesn’t Qualify for 1031 Exchange Treatment

cabin 1031 exchange

The first question many taxpayers have when they're considering a 1031 exchange is: "does my property qualify?" Here is a quick breakdown of property that does not qualify for 1031 deferred exchange treatment.

Disqualified 1031 Property

Anything that's not used for investment or business purposes or used in one's trade does not qualify for 1031 treatment because section 1031 is only for that which is used in investment, business, or trade. Certain assets are also excluded specifically such as stocks, bonds, and evidences of indebtedness. Partnership interests are also excluded, although there are some exceptions. If you want to do a 1031 exchange, you need to stay inside of the strike zone for 1031 exchanges. For more information check out: The 1031 Strike Zone - Does My Property Qualify?

Troublesome Property Types

Some of the troublesome issues and types of properties to look out for are:

  • § 1031s with lake cabins or second homes that may have been used for personal use.

  • § Flip and rehab properties that may have been held primarily for re-sale.

  • § Buying sheriff certificates and foreclosed properties subject to long redemption right.

  • § Partnership interests, stock in corporations and cooperatives.

Finally, bear in mind that foreign property is not-like kind to US property.

  • Start Your 1031 Exchange: If you have questions about what types of property qualifies for 1031 treatment, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

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The 1031 Strike Zone - Does My Property Qualify?

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Whether or not your property qualifies for a 1031 exchange is determined by whether or not it fits in the IRS’s strike zone for a 1031. Inside this strike zone are properties held for investment or business purposes. We have talked at length about the various types of property that fall within this strike zone, but what exists outside the strike zone for 1031 exchanges?

Outside the Strike Zone

Outside the 1031 strike zone are 2 major categories:

  1. Properties used primarily for personal use like a lake cabin or a ski chalet, or the car you use to drive to the grocery store. You are not holding these for investment or business purposes. They are for personal use.

  2. Inventory or property you hold primarily for resale. Let’s say a taxpayer buys a big tract of land and chops it up into parcels that they then sell to the public to build homes on. Is that taxpayer holding that property for investment or business purposes or are they holding it for inventory for sale to the public? A surly IRS agent would say the latter and deny a 1031 exchange.

So condo converters, developers, and even house rehabbers or flippers don’t fit neatly into the 1031 strike zone. If you fall into one of these categories and are considering a 1031 exchange, contact a qualified intermediary to discuss your options.

  • Start Your Exchange: If you have questions about whether or not your Minnesota property qualifies for a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Where to Find 1031 Exchange Replacement Property

Finding a great replacement property is often the most difficult part of a 1031 exchange of real estate. In this article, we are going to offer up a few tips for finding your ideal 1031 exchange replacement property.

Look in Different Locales

Many taxpayers starting their first exchange begin their replacement property search in the same general geographic area as their relinquished property. While there’s certainly nothing wrong with that, it is quite limiting. When you are looking for replacement property, expand your search to different cities or even different states. 1031 exchanges can be conducted between US states and locales so there’s no reason to limit your search.

Look in Different Market Sectors

You should also investigate properties in different market sectors. Nearly all investment real estate is considered like-kind to all other investment real estate. That means you can 1031 exchange between property in different industries and market sectors. In fact, this is quite a common practice among taxpayers. If you’re selling a retail property, perhaps you should consider a rental property like a duplex or apartment complex.

Contact a 1031 Intermediary

If you are considering a like-kind exchange for your investment property, the first thing you should do is contact an experienced intermediary who can make sure you are fully prepared before you even begin the process. 1031 exchanges can get complicated quickly, but the qualified intermediaries at CPEC1031, LLC make things as easy as possible for you. We can answer all of your questions, prepare the required documents, and walk you through the 1031 exchange process from start to finish. Contact our team of professionals today to get your exchange off the ground. We are located in Minnesota, but provide 1031 exchange services across the country.

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Defer the tax. MAXIMIZE your gain.