Converting 1031 Property to Primary Residence
Posted by Andy Gustafson on Fri, Apr 23, 2010
Land or a rental property can be converted into a primary residence as long as the Exchangor did not have a concrete intent to convert at the time of purchase. If the property is converted soon after the purchase, the IRS will most likely want to talk with you. If you have an undefined intent to build a home or the possibility of conversion exists, but no definite plans have been established or architectural drawings have been created, then this intent should not prevent the conversion.
Revenue Procedure 2008-16 provides a safe harbor helping us to understand on long a replacement property must be held prior to conversion in a 1031 exchange. The property qualifies as replacement property if held for two years. If the replacement property is a rental, then it must be rented to another person(s) (non family member) at a fair market rental for 14 days or more; and the Exchangor's use does not exceed the greater of 14 days or 10% of the number of days during the two 12-month periods the property is rented.
There are rules to follow that enable the $250,000 or $500,000 exclusions to potentially eliminate if not reduce the Federal capital gains tax due upon sale of the replacement properties in a 1031 exchange. Seek the counsel of a CPA or tax attorney.
