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Roger, Lawyer
Category: Real Estate Law
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Experience:  BV Rated by Martindale-Hubbell; SuperLawyer rating by Thompson-Reuters
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So, I complete an 1031 property exchange, selling my single

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So, I complete an 1031 property exchange, selling my single family home rental property and purchasing another home, which I immediately rent. In several years, I decide to sell my current personal residence which is somewhat larger and more expensive to upkeep, and move into my rental property, which I then renovate and use as my final home for retirement.
What is my tax liability for the second rental property and when would it become due?

Hi - my name is XXXXX XXXXX I'm a Real Estate litigation attorney here to assist you.


The answer is that there is no hard and fast rule, but a subsequent transfer should not prevent the exchange from satisfying the requirements provided that the exchanger did not have a concrete intention to convert the property to personal use at the time of the exchange.


While this is the legal answer, most people want a time frame. Most identify two (2) years as the IRS has ruled that a two-year minimum rental period was sufficient to meet the qualified use test.


Thus, there would be no tax liability for the transfer as it will remain exempt. However, you would owe your regular taxes on the property once you take it over as your personal residence, and you would owe tax when you sell the property as it would not be a qualified 1031 property if it is a personal residence.

Customer: replied 6 years ago.
I'm unclear on your last paragraph: If I make this second rental property my personal residence and then say, 10 years from then, I have to go a nursing home and sell the home, why would I have a tax liability, since I'm now selling my personal residence?
I am referring to the tax exemption allowed for a 1031. If you convert the property to a primary residence, you would not be eligible for the tax relief when you sell the property.

Instead, you would have to pay capital gains taxes on the sale just as you would in any regular transaction.
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