when can i move into 1031 exchange property

Comprehensive Research Report on Moving into a 1031 Exchange Property

Identification and Acquisition Deadlines

When participating in a 1031 exchange, there are strict timelines that must be adhered to. Initially, an investor has 45 days from the closing of the relinquished property to identify potential replacement properties. This is known as the Identification Period.

The Replacement Property must then be received within the earlier 180 days after the transfer of the first Relinquished Property or the due date for the Exchanger’s tax return for that year. These deadlines are inflexible and are not extended for weekends or legal holidays.

Replacement Property Identification Rules

During the Identification Period, the investor must follow specific rules to identify potential Replacement Properties properly. One option is the Three-Property Rule, which allows the identification of up to three properties regardless of their market value.

Alternatively, the 200% Rule permits identifying four or more properties, provided their combined fair market value does not exceed 200% of the relinquished properties’ value. If the investor identifies more properties than these rules allow without meeting certain exceptions, it is as if no Replacement Property was identified, which can jeopardize the exchange.

Holding Period and Conversion to Primary Residence

The property acquired in a 1031 exchange must initially be held for investment or business purposes. Converting a 1031 exchange property into a primary residence is possible, but there are specific requirements to ensure the exchange remains valid.

To demonstrate investment intent, the property should be rented out for at least two years. After this period, and if it has been held for a minimum of five years, it may be converted into a primary residence without fully taxable consequences.

Safe Harbor for Personal Use

The IRS provides a safe harbor for personal use of the property. If the property is rented out for at least 14 days per 12-month period and personal use does not exceed the greater of 14 days or 10% of the rented days, the investor’s intent is unlikely to be challenged.

Mixed-Use and Related Party Transactions

Properties with mixed-use can be part of a 1031 exchange, provided the investment portion meets the requirements. Transactions involving related parties are permitted but come with additional scrutiny. It is important to ensure that the title to the replacement property is taken like the relinquished property.

Qualified Intermediary and Reporting

A qualified intermediary should be selected to facilitate the exchange, holding the sale funds until the replacement property is purchased. Every 1031 exchange must be reported to the IRS, and the intermediary’s credentials and experience are crucial.

Tax Deferral and Equity

To defer all taxes, the investor must roll over all equity from the relinquished property into the new replacement property. If the investor receives any funds or “boot” during the exchange, they will be liable for capital gains tax on that amount.

Conclusion

Moving into a property acquired through a 1031 exchange is possible, but it requires careful planning and adherence to IRS rules. The property must be held for investment purposes for a set period before it can be converted into a primary residence, and the exchange must be properly structured and reported to avoid taxable events. By following the guidelines and timelines, investors can successfully navigate the 1031 exchange process and eventually make the replacement property their home.

Sources:

  • https://www.1031exchange.com/faq/
  • https://money.com/1031-exchange-timeline/
  • https://www.doorloop.com/blog/1031-exchange-timeline
  • https://www.realized1031.com/blog/when-can-i-move-into-a-1031-exchange-property
  • https://www.1031corp.com/exchanging-thoughts-blog/1031-exchanges-mixed-use-properties
  • https://www.firstexchange.com/always-consider-1031-exchange

About the author

Nathan Tarrant

Nathan has worked in financial services, marketing, and strategic business growth for over 30 years. He was the founder and COO of a Queens award-winning financial services company based in the UK, and a capital investment company in Virginia USA..

He operated as a financial & alternative investment advisor to delegates of the UN, World Health Organization, and senior managers of Fortune 500 companies in Geneva, Switzerland, after the 2008 financial crash.

As an avid investor, especially in alternative investments, he runs this blog Altinvestor.net, sharing his growing experience and views on alternative investments. You can see Nathan's full profile at his personal website nathantarrant.com
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