The IRS has used the “intent” of the taxpayer, predominant use and rental-property rules to determine when a property is held for productive use in a trade or business or for investment. That means that in the two years leading up to sale, if the taxpayer utilizes the property for pleasure more than 14 days each year or more than 10% of the rental period (the greater of the two is permitted), the IRS may take the position that it was predominantly a personal-use asset and deny deferability.
We generally advise clients to live in the property for two years and then rent it for two years just before sale. The replacement property should be rented for two years, with less than 14 days or 10% usage; then it can be converted to primary use after qualifying for the completion of the 1031.
George M. Christofely, CPA
Ocean City, N.J.
