Tax Guru – Ker$tetter Letter

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Sec. 1031 & 121

Posted by taxguru on May 15, 2007


Subject: Exchange Question


We are considering doing a 1031 exchange on a single family rental, which has been held for 32 years, and is owned free and clear. 


The idea would be to exchange this rental home for TWO single family homes, and use them as rentals (like/kind).  Then, after 3 years, move into one of the rentals and live in it for two years,  meeting the five year holding requirement & 2 year residency requirement …. Then we would sell new Rental Property #1 as a personal residence, and then move into the Rental Property #2 as a permanent residence, and live in it indefinitely.


Each of the newly exchanged properties would be rentals – the first one for 3 years (then move in for 2 years), for a total of 5 … and the next exchange property would be a rental for 5 years until we could meet the time requirements.


This is hard for me to explain, but I hope you can get a grasp of what I’m trying to do.  Trade one rental for two, and live in the two rentals (over a period of five years before moving into rental #2) so as not to pay capital gain taxes.    Would these time lines work? 



That plan could work, assuming our rulers in DC don’t mess with the tax laws over the next five years to change any of the timing details, which you have correct for the laws as they stand now.

I have one very big word of caution for you.  Keep your intention to reside in one of the new rentals to yourself. Blabbing around to a lot of people that you had that plan from the beginning could jeopardize your 1031 exchange because an aggressive IRS agent could classify the house as personal at the time of the exchange.  I have seen and heard of cases where people shot themselves in the foot by bragging about plans such as yours.  All it takes is one jealous person to turn you in and you’re cooked.  The decision to move into the rental has to appear to be made long after you take ownership of it.

Other than that, it sounds as if you are looking at things creatively, which is what makes the tax game so much fun.

Good luck.

Kerry Kerstetter





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