Addition Added after a 1031 Exchange.

[JimD]

I have a client that has completed a 1031 exchange and he now wants to add an additional residence to the new property to use personally (occasionally). Would this have an adverse impact on the 1031 exchange? If so, as an alternate could he park a travel trailer on the property? Any input will be helpful!

[IntuitJim]

Jim, thanks for joining the Community and good question. 1031 Exchanges apply to investment or business real estate, not residential property. To qualify, the property can't immediately be converted to personal use. In 2008 the IRS set forth a safe harbor rule, under which it said it would not challenge whether a replacement dwelling qualified as investment property for purposes of a 1031. To meet that safe harbor, in each of the two 12-month periods immediately after the exchange: (1) you must rent the dwelling unit to another person for a fair rental for 14 days or more; and (2) your own personal use of the dwelling unit cannot exceed the greater of 14 days or 10% of the number of days during the 12-month period that the dwelling unit is rented at a fair rental.

Good luck!

[JimD]

Thanks Jimaintuit:

I failed to mention in my original question that the newly acquired property in the 1031 exchange is a investment residential rental property. So, if they add another residence to this property. Then it appears they would have to rent that property for 14 days or more and limit their personal  use to the greater of 14 days or 10% of the number of days during the 12-month period that the dweling unit is rented at a fair rental. Also, to meet the safe harbor rule they would need to do that for each of the 12 month periods immediately after the exchange.

Thanks again for your input.

JimD

[IntuitJim · Accepted solution]

Yes, I believe that would preserve the character of the property and the integrity of the 1031.