Converting 1031 Exchange To Primary Residence
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM # LAW 676
By Ilyce R. Glink and Samuel J. Tamkin
Summary: A reader used a 1031 exchange to
purchase a new rental property. After a year, they have discovered that the
property is very difficult to rent out and they now want to use it as their
primary residence. Ilyce and Sam explain that in order to convert the investment
property into a primary residence, one must wait two years.
Q: We did a 1031 Exchange last year. We rented the house back to the previous
owners for three months and have advertised the home for rent every month for
the last nine months without success.
(article continues below useful links)
It is very expensive to keep up with all the expenses on our house and the
rental house. We planned on renting the house for at least two years. However,
since we are not getting a renter, when would it be legally safe to move into
this property as our primary residence?
A: A 1031 exchange is a mechanism used to defer paying tax on gains realized
from the sale of an investment property. To defer these taxes, the seller of
an investment property buys a replacement property of equal or higher value.
The seller has to satisfy timing requirements and other rules, but when she
does, she is able to sell and buy a new property without having to pay the IRS
any taxes. But keep in mind that the new property that is purchased must be
used for investment purposes.
If you want to convert the investment property into your primary residence,
you must wait two years. If you don’t wait the two years, the IRS may
decide that your 1031 exchange was invalid and tax you on the profits made from
the sale of the property you previously sold.
You should talk to your accountant on this issue to decide whether paying the
taxes owed on the sale is less than keeping the property while it sits vacant
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce
R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your
Home Faster and For More Money In Any Market. If you have questions for
them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022
or contact them through Ilyce’s website www.thinkglink.com