Can I Call My Replacement Property My Personal Residence & Investment?

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:

1. Was your intention primarily to use the property for recreational and personal use or,

2. 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

Can I Purchase my 1031 Exchange Replacement Property on a Contract for Deed?

A lot of people wonder: "Can I purchase my replacement property on a Contract for Deed?" As financing gets more and more challenging, seller arranged financing looks more appealing. So, if we can find a seller that will convey their property to us on a Contract for Deed, will that property work as a 1031 replacement property?

How Can This Work for a 1031 Exchange if I do not have Full Legal Title?

This question might be lingering in the back of your mind. What happens when you are the vendee, but the vendor still holds legal title? Considering the fact that, as a purchaser under a Contract for Deed, you don’t receive the actual deed until you are done making all payments, does this qualify as a 1031 Exchange?

The Question: Who is the Owner for Federal Tax Purposes?

The answer is probably because a Contract for Deed vendee receives the benefits and burdens of ownership. And, you want to make sure that your Contract for Deed is drafted so that it gives you the benefits and burdens of ownership:

1. you bear the risk of loss of the property if destroyed;

2. you bear the obligation to pay the property taxes;

3. you have exclusive right of possession of the property.

All of these factors really weigh on the side of you being the equitable owner of the property and the equivalent of the owner of a fee interest in real estate for federal tax purposes.

Put the Exchange Funds Down as the Down-Stoke If You are the Owner

So, you can purchase your replacement property on a Contract for Deed. In theory, you would take all of your 1031 exchange funds (all of your net proceeds from your relinquished property) and plunk that down as your down-payment. Once your 1031 exchange is complete, you will continue making incremental installment payments going forward until the Contract for Deed is satisfied, at which time you would receive the deed for the property. However, in the interim, you are the equitable owner of the property, and that should be sufficient to complete your 1031 Exchange.

• Start Your 1031 Exchange: If you have questions about contract for deed issues relating to 1031 exchanges in Minneapolis, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved