Published by Allen Brown
A 1031 exchange is a way to swap one investment property for another without paying taxes on the money you make from selling the first one. This is helpful for people who want to buy a bigger or better investment property without paying taxes. But here’s the question: Can you use your investment property as your home after doing a 1031 exchange? In this article, we’ll give you the low-down on the like kind exchange; what properties are eligible and some of the requirements regarding timing and regulations.
The Basics of Like-Kind Property Exchange
Like-kind properties are real estate investments that can be swapped for other real-estate investments without paying capital gains taxes immediately. These properties must be used for business or investment purposes, not as a home. It doesn’t matter if the new property is better or worse than the old one. Most real estate qualifies for 1031 exchange, including land, houses, office buildings, and even empty land. You don’t have to rent the property to use a like kind exchange.
Here are some examples of like-kind properties:
- Rental houses or apartments
- Office buildings
- Apartment buildings
- Industrial buildings
- Vacant land
- Wind farms
A replacement property is another piece of real estate you swap for your old one. They don’t have to be the same. For example, you can trade a farm for an apartment building. The main rule is that both properties must be used for making money, like renting them out or as a business. As long as they meet this condition, almost any type of real estate can be swapped for another.
Can a Property from a 1031 Exchange Become Your Permanent Residence?
You can use a 1031 exchange property as your home, but there are rules. If you sell a property and use a like-kind exchange to buy a new one, you don’t have to pay taxes on the money you make. But, if you change your mind and decide to live in the new property immediately, you might have to pay those taxes. To avoid paying taxes, you must keep the new property as a rental for at least two years before moving in. This shows that you bought it as an investment, not a home.
If you don’t follow these rules, you must pay taxes on the money you made from selling your old property. You can turn an investment property into your home, but you may wait a while to avoid paying extra taxes.
How long must you wait to live in the new 1031 property?
Many investors ask if they can stay in a property acquired through a 1031 exchange after two years. The IRS says it’s generally okay to move in after two years. Therefore, they won’t question if you were investing in the property. But if you move in sooner than two years, the IRS might say you didn’t mean to invest and make you pay taxes on the money you made from selling your old property.
If you want to turn your rental property into your home or vacation spot, there are specific rules to follow:
- You must show that you bought the property to rent out, not to live in.
- You can rent the property for two years before moving in.
- You should rent your property for at least 14 days during those two years.
- You cannot live in the property for more than 14 days or 10% of the rental days during those two years.
- After two years of renting it out, you can make it your home or vacation place.
Conclusion
Now you know after using a like-kind exchange to buy a new property, you can’t immediately use it for a permanent residence. You can wait a while before making it your home. There are specific rules about how long you must wait and how to handle the property. Talking to a tax professional is best to ensure you do everything right. However, the general idea is that you treat the new property as an investment for a certain period before turning it into your home. This process will help you save on taxes.