How Long Does Personal Use Real Property Need to be Used for Business Purposes Before it Can be 1031 Exchanged?

One of the most commonly asked questions about 1031 exchanges is how long do you need to use real property for investment or business purposes before it can be exchanged in a 1031 transaction?

The 1031 exchange holding period is a cognitive test – not an objective time frame. With that in mind, it’s important to discuss it with your CPA, accountant, and other advisors on the specific transaction. When you acquire your replacement property in a 1031 exchange, your intention must be to hold that property for investment or for use in your trade of business. That’s the requirement.

Safe Harbor

There is a safe harbor that is applicable to VRBO, Airbnb, or other intermittent rental properties. If a client buys a replacement property and puts it into an intermittent rental plan, the IRS under their safe-harbor tests two twelve month periods. In other words, after acquiring such a property, they examine two twelve month periods to ensure that you are using the property for investment or business purposes.

Since we know that the IRS has this standard for intermittent rental properties, some tax advisors use this standard (a minimum of 24 months) for other types of 1031 exchange.

I’ve had clients get audited who have moved into their replacement property. In one instance the client won the audit. She had rented the property to a tenant in an arms-length lease and documented receipt of rent checks for 18 months. Another client of mine moved into their replacement property after three months. This did not go over well with the IRS.

Intent Matters

At the end of the day, it’s your intent that matters. Things can change in the future, or course, but it’s your initial intention when purchasing the property that the IRS looks at when determining whether or not you are abiding by the regulations.

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

How You Can Still Do Personal Property 1031 Exchanges in Some States

As we’ve discussed before, the Tax Cuts & Jobs Act effectively removed items of personal property from 1031 exchange treatment. But there are still some cases in which a personal property exchange can be used at the state level. In this article, we are going to explain how the personal property exchange can still be a viable option for people in certain states.

Personal Property Under Section 1031

Personal property exchanges were really hot before the Tax Cuts & Jobs Act was written into law. But people are still able to do personal property exchanges in some fashion.

For federal tax purposes, personal property is no longer eligible under section 1031. That said, some states have decoupled from certain aspects of federal tax law and there are some states that would technically still allow personal property exchanges for state tax deferral purposes. When you think about it, even the ability to defer your state taxes can be significant, especially in high tax states like Minnesota and California. This is true if you’re buying and selling an individual piece of personal property – say an aircraft – but it’s even more meaningful if you’re an owner of a fleet of aircraft.

Like-Kind Exchange Intermediaries

1031 exchanges are the best way to defer capital gains taxes on the sale of your investment or business real estate. Give our team of 1031 exchange professionals a call today to learn more about the process and how we can help. Our home base is in downtown Minneapolis but we have satellite offices around the United States. No matter where your property is located, we can help you through the details of your 1031 exchange.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

Personal Use & 1031 Exchanges – Striking the Right Balance

A common question we get about 1031 exchanges is “can I use my vacation home in a 1031 exchange?” The short answer is yes, but you have to be extra careful with this type of exchange. In this article, we are going to talk about how to strike the right balance when it comes to personal use of property and 1031 exchanges.

Rental Use vs. Personal Use

When dealing with 1031 exchanges of vacation homes, you have to pay close attention to rental use vs. personal use. If you use your vacation property for personal use too much, it can disqualify you from 1031 exchange treatment. Here are a few guidelines to follow to ensure the success of your 1031 exchange of your vacation home:

• Make sure you have owned the property for at least two years prior to and after the sale.

• In the 1-year periods immediately before and after the exchange, the property must be rented to an unrelated party for at least 14 days.

• In the 1 year periods immediately before and after the exchange, the taxpayer’s personal use cannot be more than 14 days, or 10% of the days during which the property was rented.

For specific guidelines from the IRS on this topic, check out Revenue Procedure 2008-16.

Skilled Qualified Intermediaries in the Twin Cities

At CPEC1031, we specialize in 1031 exchanges of real estate. Our skilled qualified intermediaries have over two decades of experience helping clients save money on capital gains taxes. Contact us today to set up a time to chat with one of our 1031 exchange specialists. You can find us at our primary office in downtown Minneapolis or at one of our satellite offices across the country. We’re here to help you defer your capital gains taxes on the sale of real estate!

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

Does a Motor Home Qualify for 1031 Exchange Treatment?

The new tax law has a lot of 1031 investors asking questions. In this article, we are going to tackle the question: can a motor home be exchange in a 1031 transaction?

Tax Reform

The short answer is no, you cannot exchange your motor home in a 1031 transaction. As a result of the recent tax law that went into effect on January 1, 2018, only real property may be exchanged in a like-kind tax deferred transaction under 26 USC 1031. The code now states that:

Section 1031(a) Nonrecognition of gain or loss from exchanges solely in kind

1. In general, no gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.

Check out this article for more information. 

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

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

Personal Use Rules in a 1031 Exchange of Real Estate

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