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

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