1031 Exchange Question

"Like Kind property" is left pretty open for interpretation by the qualified intermediaries who facilitate the transaction. As long as each property is income producing, most will be comfortable with the the exchange you described. Reach out to a few and bring a favorable opinion to your CPA who should then sign off on it.

Did you ever rent it?

You got two issues.

1) If it becomes personal property, how do you get the 121 home sale exclusion (since your gain will be higher due to the deferred gain from the 1031 exchange).

2) How do you prevent the IRS from applying step doctrine and blowing up the 1031 exchange and forcing you to pay the tax on the gain in the exchange year (and this may happen on audit several years later).

In order to take advantage of the Sec 121 home sale exclusion, you have to hold the new property for 5 full years (in addition to having it be your personal residence for 2 years of those 5).

To make sure the IRS doesn't toss out the original 1031 exchange deferral, You have to prove that you intended to keep the new property as investment, but that situations changed after you acquired the replacement property.

There is a safe harbor available, the IRS won't toss the original 1031...

1) You have to own the replacement property for at least 24 months
2) divide that 24 month period into two equal 12 month periods
3) you must rent out the house for at least 14 days, at a fair market rent, during each period
4) your personal use can't exceed the greater of a) 14 days or b) 10 percent of the rental days, during each period.

If you fail the safe harbor, then you can try to argue facts and circumstances and intent at the IRS. There are no guarantees there.

I think your CPA has a right to be concerned, if you were my client, I would probably have you sign something saying your intention was to keep it as investment property. That's to protect me, by the way, not you =)

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How much gain are you going to have?

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70k

I have dealt with a lot of 1031s down here at the beach, the fact that it is rental or not is immaterial to meeting the criteria...find a new CPA

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I have dealt with a lot of 1031s down here at the beach, the fact that it is rental or not is immaterial to meeting the criteria...

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Uhh... personal use property is specifically excluded.

If you deal with it at the beach, my guess is you have a lot of rentals who do this, and occasionally some of what the IRS calls "vacation houses".

Now, like anything else... it only matters if you get caught...

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is the IRS really going to go through a shite ton of investigation on a dinky transaction like this?

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The IRS said this week that basically, they don't have the money or expertise to after rich/complex transactions, the "dinky" ones don't bring in a lot of money per transaction, but they are easy.

If OP only owned the original property for 2 weeks, how can any ‘original intent’ of the first property be determined? For all we know his original intention was to rent it out as a short term rental. He sold and is now buying a 2nd short term rental.

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I’m at the beach and hear stories of people 1031 property at home and buying beach rentals all the time. This is anecdotal certainly, but I know of multiple people that did it with commercial property from home to a beach condo. That’s not similar in anyone’s view.

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Actually, a commercial property that's rented out and a beach residential property that is rented out, is considered similar property for those rules. The key is, they are both being rented out, and neither is a personal use property (occasional use of the beach house for personal use is ok provided you meet the safe harbor above).