1031 exchange conversion to principal residence.

Dear 1031x: My wife and I completed a residential rental property 1031  exchange in December 2003. We rented it soon thereafter, in February 2004  and it has been rented now for 22 months. We want to move into the house and make it our primary residence. How long  do we need to wait to do this so as to avoid capital gains taxes on the  original property sale? How soon after taking residency can we sell the  house and be subject only to capital gains taxes on it as our personal  residence? Thank you for your consideration.

 

Dear James:  Thank you for contacting us.  Under 1031 both properties must be held for investment.  Investment intent is determined at the time of purchase of the replacement property.   After you purchase for investment, if an unforeseen change in circumstances occurs in your life then you can convert your investment property to your principal residence.  There in no specific time frame specified.  Longer is better.   After conversion you must own the property for five years and live in it for two of the last five years in order to qualify for tax exemption under code section 121.   If you move into your replacement property now, then your five year period would run through December 2008.   I hope this helps.  Sincerely,

Steve Hickox
Attorney / President