1031 Exchange - adding on personal property

[BulldogTom]

I have a client who is determined to blow up his 1031 exchange.   I think I have stopped most of his plans, but today he calls me and says he is building a studio on top of the garage of the property he exchanged for.   Plans to live in it.   

I think that blows the exchange, but I am not having any luck finding something I can give him that says it is personal use.

Help please.

Thanks

Tom
Longview, TX

[G2R]

Perhaps this article might help... It's not an exact answer, but it hits many of the points you might question. 

https://farr.com/1031-exchange-into-principal-residence/

[Lee B]

52 minutes ago, G2R said:

Perhaps this article might help... It's not an exact answer, but it hits many of the points you might question. 

https://farr.com/1031-exchange-into-principal-residence/

Good article: 

"Don’t start construction on preparing the house for your personal use right after acquiring it"

"The principal question is your intent when you acquired the replacement property.  If you sincerely intended to treat it as investment property and not to move into it at the first opportunity, then you are on the right track.  How can you prove that intent?  If you can’t meet the safe harbor test discussed below, the best way is to actually use the property for investment purposes for a significant period of time after its acquisition.  If you rent the house out at fair market value for at least a year (according to some commentators), then you likely have shown you acquired the property with investment intent.  If you merely put up a good show, on the other hand, such as listing it for rent at an amount that is significantly higher than market, or not even listing it at all, the IRS will see right through that"

Sometimes it's amazing how hard it is protect clients from themselves.

[DANRVAN]

On 12/15/2021 at 3:45 PM, BulldogTom said:

is building a studio on top of the garage of the property he exchanged for

What are his plans for the garage?

[BulldogTom]

Did not ask him, assume it is still part of the rental.

Tom
Longview, TX

[Lion EA]

On 12/15/2021 at 6:45 PM, BulldogTom said:

...he is building a studio on top of the garage of the property he exchanged for.   Plans to live in it.

 

[DANRVAN]

I caught that part Lion EA.  My question is what are the plans for the garage.  Is this a commercial garage like a repair shop?  Is there other replacement property other than a garage?

 

 

 

[DANRVAN]

On 12/15/2021 at 3:45 PM, BulldogTom said:

I think that blows the exchange,

It depends on fact and circumstances.  For instance if the replacement property consisted of multiple units, there could be a partial disposition with the conversion to personal use.   On the other hand, if this is a commercial building rented out for high dollars, constructing personal living quarters might have minimal tax consequences with the continued use of the rental portion.  

If the garaged is converted to personal use then 1031 is probably shot to pieces.

[Lion EA]

Was asking Tom who referred to both personal living quarters AND "still part of the rental."