Converting Rental Property to Primary Residence

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In a recent ruling Goolsby v. Commissioner (April 1, 2010); T.C. Memo 2010-64 the Tax Court held that property purchased by taxpayers in a 1031 exchange did not qualify as replacement property when in two months after the purchase the taxpayers moved into the property. 

Intent and Facts Supporting Intent

Often the question asked is what facts are needed to support the intent to hold the property as an investment. Time is one fact of many that did not support their intent to hold the property as an investment or in a business. An additional fact in this case was that adequate effort was not given to rent the property. One of the facts needed to support the qualified use test is that the property is rented at least fourteen days each of the two years the property is be held prior to converting the character to a primary residence. Furthermore, the taxpayers began steps to finish the basement, obtaining building permits within two weeks of purchase. The Court interpretted this as another fact not supporting their intent to rent the property.

Accommodating Accommodator

Don't rely on "the accommodating accommodator" who may not fully understand the 1031 rules and current Tax Court rulings. In this case, the taxpayer was also found liable for the accuracy-related penalty due to an understating of the tax due. 

Given the current abundance of foreclosures, land for sale, condos for sale, investments require tax planning to understand the income tax implications should the investment be converted to personal use. 

To learn more visit our Frequently Asked Questions for more about converting rental property to personal use.