I sold a rental residence in one state and will be using the proceeds to purchase another rental property in another state via a 1031 exchange. How should this transaction be reported for tax purposes? Also, if I convert the new rental property to a primary residence, will that disqualify the 1031 exchange?

ANSWER

The BIDaWIZ Team's Answer:

First, you would report the 1031 exchange to the IRS on Form 8824 and file it with your federal tax return for the year in which the exchange occurred. The form asks for key information such as the descriptions of the properties exchanged, dates that properties were identified and transferred, any relationship between the parties to the exchange, value of the like-kind and other property received, gain or loss on sale of other (non-like-kind) property given up, cash received or paid; liabilities relieved or assumed, and adjusted basis of like-kind property given up. In terms of your second question, you may be able to move to the rental property and convert it into your primary residence. However, you need to live in that home for at least two years to claim the capital gains exclusion. The other point to consider is that you need to be careful about converting the rental property into a primary residence as it can negate the original 1031 exchange if done too soon. The IRS doesn't specific a specific time, but it should be at least a couple of years.