Can I Call My Replacement Property Home Personal Residence and Investment?

(Listen Here 3:06 min)

Sometimes people want to do a 1031 Exchange into a property that they plan on immediately occupying as their home. And, they wonder to themselves – well, I know that I have to treat my replacement property as either business property, property used in my trade, or as investment property. Well, I hope that my personal residence goes up in value, so it must be an investment, right?

Recent 1031 Tax Court Case – on 1031 Property Exchange of Lake Cabin

In a case called Moore vs. The Commissioner of Internal Revenue, a similar question was put before the tax court. A person was trying to do a 1031 Exchange from a second home lake cabin into a bigger, better second home lake cabin. The taxpayer in the case said “Well, you know that this is a scarce commodity, and I anticipate that it will go up in value. I hope it goes up.” The taxpayer was trying to make the argument that, even though it was his second, his lake cabin that he never rented out, never advertised as a business property that it was held for investment, so that it should qualify for 1031.

Hoping For an Increase In Value on Your
“Personal Use” Property ≠ Investment

The tax court did not buy this argument. They said “Yes, everybody hopes that their primary residences and second homes go up in value. But, we really need to look at how you use the property to decipher what your intention was. Was your intention primarily to use the property for recreational and personal use? Or, was your intention to hold it for investment?”

1031 Lesson Learned – Do Not Hold Primarily for Personal Use

Under the facts of the Moore case, the taxpayer was found to primarily hold the property for personal use. So, getting back to our question, “Can I call my replacement property home/personal residence an investment, especially if I move into it immediately after I have completed my exchange?” The answer is probably, no. That would not qualify because your use as your home is antithetical, completely opposite to use in one’s business, use in one’s trade, or holding for investment.

About the Author:

Jeff Peterson (AKA: "Professor 1031") is a Qualified Intermediary and Serves as an Adjunct-Professor for the William Mitchell College of Law (Where He Teaches About Federal Income Tax). Jeff Works With People From All Over the USA to Save Money on Federal Capital Gains Taxes.

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