Can You Move into a §1031Exchange Rental Home

The short answer is Yes and Maybe.  There are always con­di­tions and con­cerns regard­ing the tim­ing of mov­ing into a home that was acquired through a sec­tion 1031 tax deferred exchange. 

June 1, 2025

By Al DiNi­co­la, AIF®
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC Mem­ber of FINRA/SIPC

Fol­low­ing the sug­ges­tion (rules) will assist in a sit­u­a­tion where your tax deferred exchange sta­tus is inval­i­dat­ed.

What is the Basic Rule

A prop­er­ty acquired through a §1031 exchange must be held for invest­ment or busi­ness pur­pos­es, not as a pri­ma­ry residence—at least ini­tial­ly.

When Can You Move In?

The IRS does not give a spe­cif­ic time­frame, but gen­er­al­ly there are sug­ges­tions pro­vid­ed by the IRS. Sug­ges­tions may not be hard and fast but may offer a guide­line. Rev­enue Pro­ce­dure 2008–16 (Safe Har­bor Rule) sug­gests you should rent the prop­er­ty out for at least two years before you move into the house for it to be con­sid­ered your per­son­al res­i­dence.

So, what exact­ly is the Safe Har­bor rule?

• You must rent the house (or prop­er­ty) for the fair mar­ket val­ue for at least 14 days per year.
• You must lim­it your per­son­al use to 14 days per year, or 10% of the days it’s rent­ed, what­ev­er is greater.
• After this sug­gest­ed two years of this pat­tern, you can con­vert it to a pri­ma­ry res­i­dence to reduce the risk of the IRS chal­lenge.

 Why This Mat­ters

• The 1031 exchange could be dis­qual­i­fied, if the IRS deter­mines that your intent was to use the prop­er­ty as a per­son­al res­i­dence from the begin­ning.  This would make the gain on the prop­er­ty imme­di­ate­ly tax­able. This would/may be for both fed­er­al and state tax­es.
• If you lat­er sell the prop­er­ty after con­vert­ing it to a pri­ma­ry res­i­dence, you may be eli­gi­ble for Sec­tion 121 exclu­sion (up to $250,000/$500,000 of gain). There are tim­ing rules asso­ci­at­ed with the §121 exclu­sion. One rule is liv­ing in the pri­ma­ry res­i­dence two years out of the past five years. How­ev­er, the peri­od when it was a rental must be exclud­ed from the exclu­sion by IRS rules (2009 change). As always, con­sult your CPA on your par­tic­u­lar sit­u­a­tion.

Tim­ing may look like this

• Years 1–2 rent prop­er­ty as invest­ment use only
• Year 3 con­vert to pri­ma­ry res­i­dence
• Year 5 poten­tial­ly qual­i­fies for par­tial exclu­sion if you sell (with poten­tial lim­i­ta­tion on the rental peri­od.
• The longer you reside in the prop­er­ty as a pri­ma­ry home the bet­ter.

Are there excep­tions to Rev. Proc. 2008–16. There may be a few excep­tions­for con­vert­ing a §1031 exchange rental into a pri­ma­ry res­i­dence. Rev. Proc. 2008–16 is not the law, just a guide­line. You can still poten­tial­ly move soon­er than 2 years but doing so car­ries more risk and scruti­ny.

Excep­tions to the Safe Har­bor

Remem­ber the game of Monop­oly?  You would be hap­py to have a “Get-Out-of-Jail-Free” card. The excep­tions are not to be con­sid­ered a get out of jail free card. There are sit­u­a­tions when mov­ing in before the 2‑year Safe Har­bor (sug­ges­tion) peri­od might still be accept­able. As always you should have doc­u­men­ta­tion regard­ing your deci­sions (along with guid­ance from your CPA).

1. Are there any changes in your intent or cir­cum­stances. As life goes on there are changes to your cir­cum­stance or sit­u­a­tion. There may be relo­ca­tion because of your job or pro­fes­sion. You may have fam­i­ly needs such as car­ing for a rel­a­tive. You may have per­son­al health issues with tak­ing care of your own prop­er­ty. There may also be the loss of ten­ants or inabil­i­ty to rent the prop­er­ty.  Cer­tain munic­i­pal­i­ties have insti­tut­ed rental restric­tions that may affect your abil­i­ty to rent the prop­er­ty. What you need to avoid (when speak­ing with the IRS) is that you sim­ply changed your mind.

2. Sub­stan­tial Rental Efforts Ini­tial­ly

If you made good-faith efforts to rent the prop­er­ty (adver­tis­ing, list­ing, work­ing with prop­er­ty man­agers), but it remained vacant or unrent­ed, the IRS may still con­sid­er it an invest­ment dur­ing that time.  In some dis­as­ter areas (recent­ly in the Ashville, NC area) the ser­vice indus­try is attempt­ing to recov­er but the process will be long. You may need doc­u­men­ta­tion regard­ing the list­ing of the prop­er­ty for lease, poten­tial cor­re­spon­dence with prospec­tive ten­ants, cor­re­spon­dence with your prop­er­ty man­ag­er and poten­tial rental reports.

3. Short-Term Vaca­tion Rentals

Some investors rent their prop­er­ties as short-term rentals (e.g., Airbnb) to show invest­ment use even if they even­tu­al­ly plan to move in. Again, the munic­i­pal­i­ties may have enact­ed restric­tions.  How­ev­er, when you rent it must be at a fair mar­ket val­ue (and not always at a friends and fam­i­ly rate). Any per­son­al use needs to be restrict­ed to 14 days or 10 % of the days rent­ed. If you rent for 6 months (180 days) you may use 18 days.

4. No Absolute Min­i­mum Hold­ing Peri­od

The law does not require a spe­cif­ic hold­ing peri­od for a prop­er­ty to qual­i­fy as invest­ment prop­er­ty. Courts and the IRS look at intent at the time of acqui­si­tion, not just time alone. You could pass IRS scruti­ny in less than 2 years if your intent was clear to hold the prop­er­ty as an invest­ment.  You should have strong doc­u­men­ta­tion sup­port­ing that intent.

Be Care­ful

If you move in too soon with­out a legit­i­mate rea­son, and espe­cial­ly if there is no evi­dence of rental intent, the IRS could dis­qual­i­fy the §1031 exchange. That would trig­ger cap­i­tal gains tax on the entire deferred amount.

Best Prac­tices if You Want to Move in Ear­ly

• Rent it out for at least a full year if pos­si­ble
• Keep thor­ough doc­u­men­ta­tion of your intent to hold as an invest­ment
• Avoid claim­ing deduc­tions unless you’ve tru­ly rent­ed it. Although as an invest­ment prop­er­ty the IRS con­sid­ers depre­ci­a­tion to be tak­en on the prop­er­ty regard­less of actu­al­ly report­ing.
• Con­sult with a tax advi­sor or CPA before mak­ing any move-in deci­sion

We have con­sult­ed with investors over the years on a vari­ety of ques­tions and sit­u­a­tions. One spe­cif­ic sit­u­a­tion was in Naples, FL. The investor owned a beach front home and rent­ed the prop­er­ty for six months and lived in it for six months. The rental income as well as deduc­tions and depre­ci­a­tion, etc. were account­ed for on the tax returns for a peri­od of near­ly six years. The prop­er­ty owner/investor was able to bifur­cate the sale into Part A Invest­ment §1031 exchange (defer­ring part of the cap­i­tal gains) and Part B Sec­tion 121 per­son­al res­i­dent using the exclu­sion afford­ed.   We wel­come all ques­tions and as always, our con­sul­ta­tion is a free ser­vice. For tax advice con­sult your CPA.

NAMCOA® is a SEC reg­is­tered invest­ment advi­so­ry firm that pro­vides com­pre­hen­sive port­fo­lio man­age­ment, finan­cial plan­ning, and fidu­cia­ry deci­sion-mak­ing ser­vices on behalf of retire­ment plan spon­sors. Our Dif­fer­ence is sum­ma­rized by our fidu­cia­ry approach which enables us to bet­ter meet port­fo­lio and retire­ment plan objec­tives, result­ing in stronger risk adjust­ed returns for investors and peace of mind for Clients. We also focus on alter­na­tive real estate invest­ment. Many real estate investors are seek­ing tax deferred solu­tions uti­liz­ing §1031 exchanges or Oppor­tu­ni­ty Zones.

DSTs are not for all investors.  The acqui­si­tion of a DST is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus.  Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor.   NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 5 Cen­ter­pointe Dri­ve, Ste. 400 Lake Oswego, OR, 97035MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.