1031 rental conversion

I made a 1031 exchange in July 2004, and intend to convert the rental to a primay residence in January 2007.

If I sell the property in September 2009 and claim the $250k tax deduction (I’m single). Can the IRS place the burden of proof on me to show I never planned any of this. Or is the burden of proof on them?

I am readng a lot about "following the rules (2 years as a primary residence, 5 years since exchange was executed etc.) is not good enough for the IRS. They also want to see proof that the tax avoidance was unplanned.

Thanks for any input on this one.

IF you
[]used the property for a qualified 1031 exchange purpose at least one year following the exchange, and,[]occupied the property as your primary residence at least two years of the five years prior to the sale, and,[*]owned the property at least five years prior to the sale
you have met the IRS requirements to qualify for the capital gains exclusion for the sale of a primary residence that was originally acquired in a 1031 exchange.

Tax avoidance strategy questions are generally raised when you convert the 1031 exchange property to your primary residence too quickly following the exchange. At least one year of rental use following the exchange is considered safe.

Thanks Dave, very reassuring.

Here is a link to the type of information that was giving me doubt.


the following got my attention:

“Regardless, if Bob had the mental intention of converting the property as soon as is was safe to do so, he never had the proper intention in the beginning, and the entire transaction is taxable, no matter how long he waits.”

if you rent the property out (with written leases) and file tax return Sch E, then there is no question about your “intentions” becuase by definition it has become a bona fided rental property

as DaveT outlined, the test to determine whether a 1031 exchange is valid in your scenario is fairly clear cut. Your “proof” is your FY 04, 05,06 tax returns which will (should all have SchE) for that property.

Thanks again.

I have 2 one week leases for 2004, a lease for the last 5 months of 2005, which extended into the first 5 months of 2006.

Also I have proof of advertizing for tenants during the periods of vacancy for these tax years.

Looks like I am in good shape!

You have clearly demonstrated your intent to hold for investment. I think you are fine.