--- title: How to Convert 1031 Exchange Property Into Personal Property description: If you’ve purchased a residential asset as part of a 1031 exchange with the eventual goal of living there, there are certain steps you have to take in order to ensure your exchange isn’t disqualified and you are stuck with a hefty capital gains tax liability. image: https://www.realized1031.com/hubfs/convertiStock-1306217462.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # How to Convert 1031 Exchange Property Into Personal Property Posted Oct 8, 2024 ![Mini houses with arrows pointing upwards](https://www.realized1031.com/hubfs/convertiStock-1306217462.jpg) A 1031 exchange is a tool investors can use to buy and sell real property assets while deferring the need to pay capital gains taxes on the profits. All property relinquished and acquired using a 1031 exchange must be held for investment purposes to qualify. Here is an example of how the process works: The investor owns property they have held as an investment for several years, which has increased in value from $200,000 when purchased to $400,000. For example, suppose the property is an office building, and the owner wants to change his focus to single-family rentals. Then the investor employs a[ Qualified Intermediary (QI)](https://www.realized1031.com/qualified-intermediary) to manage the 1031 exchange. Hiring this administrator is a crucial part of the process and helps increase the probability of executing a successful exchange. The investor sells the targeted property, and the QI takes control of the proceeds. For a 1031 exchange to succeed, the replacement property or properties must have at least as much value as the property sold. The investor identifies potential replacement assets and informs the QI. The QI oversees the acquisition(s) and manages all necessary documentation. Using a 1031 exchange can potentially allow the investor to defer capital gains taxes sequentially on later exchanges. If, at any time, the investor sells the current exchange property without completing another exchange, all deferred taxes are due. The exception is if the investor distributes the final property to an heir upon death. In that case, the heir receives the property at its current fair market value, and prior deferred taxes are eliminated. ### The replacement property must be "like-kind" to the relinquished asset. The IRS will allow almost any exchange of qualified property held for investment. For example, you can swap a hotel for a solar farm, a retail center for an apartment complex, or a single-family residence in one area for a single-family residence in another area. Any investment property will likely qualify as a[ “like-kind”](https://www.realized1031.com/qualified-intermediary) swap for another. However, it’s crucial that the replacement property be an investment. ### What if the investor later wants to live in the property? Things change, and people may alter their plans for a particular asset. For example, if an investor decides to transform their rental property into their primary residence, they can do so if they follow the rules. The primary stipulation from the IRS is that the investor must maintain the property as a rental for at least two years following the exchange. The IRS requires that time period as evidence that the investor intended to acquire the property for use as a rental rather than with the intent to live there. ### What are the requirements for the investment property? For an owner to demonstrate the status of the acquired asset as an investment, the owner needs to rent it to others at fair market value during the two years following the acquisition. The rental must be at least 14 days yearly, and the investor must show rental income on their tax return. However, the owner may also use the property on a limited basis. The usage restrictions limit personal occupancy to either 14 days each year or ten percent of the total days the property was rented out, whichever is higher. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure. Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. Programs that depend on tenants for their revenue may suffer adverse consequences because of any financial difficulties, bankruptcy or insolvency of their tenants. Download The Guide To 1031 Exchange [![The 1031 Investor's Guidebook](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/1031-Exchange-eBook-250.png?width=250&height=250&name=1031-Exchange-eBook-250.png "Tackle the art and science of ...") ](https://www.realized1031.com/blog/how-to-convert-1031-property-into-personal-property#blogform) Download eBook ---   --- ### The 1031 Investor's Guidebook ![Download The Guide To 1031 Exchange](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/1031-Exchange-eBook-550.jpg?width=550&height=650&name=1031-Exchange-eBook-550.jpg) Tackle the art and science of completing your 1031 exchange. By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. 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Here is an example of how the process works: The investor owns property they have held as an investment for several years, which has increased in value from $200,000 when purchased to $400,000. For example, suppose the property is an office building, and the owner wants to change his focus to single-family rentals. Then the investor employs a Qualified Intermediary (QI) to manage the 1031 exchange. Hiring this administrator is a crucial part of the process and helps increase the probability of executing a successful exchange. The investor sells the targeted property, and the QI takes control of the proceeds. For a 1031 exchange to succeed, the replacement property or properties must have at least as much value as the property sold. The investor identifies potential replacement assets and informs the QI. The QI oversees the acquisition(s) and manages all necessary documentation. Using a 1031 exchange can potentially allow the investor to defer capital gains taxes sequentially on later exchanges. If, at any time, the investor sells the current exchange property without completing another exchange, all deferred taxes are due. The exception is if the investor distributes the final property to an heir upon death. In that case, the heir receives the property at its current fair market value, and prior deferred taxes are eliminated. The replacement property must be \"like-kind\" to the relinquished asset. The IRS will allow almost any exchange of qualified property held for investment. For example, you can swap a hotel for a solar farm, a retail center for an apartment complex, or a single-family residence in one area for a single-family residence in another area. Any investment property will likely qualify as a “like-kind” swap for another. However, it’s crucial that the replacement property be an investment. What if the investor later wants to live in the property? Things change, and people may alter their plans for a particular asset. For example, if an investor decides to transform their rental property into their primary residence, they can do so if they follow the rules. The primary stipulation from the IRS is that the investor must maintain the property as a rental for at least two years following the exchange. The IRS requires that time period as evidence that the investor intended to acquire the property for use as a rental rather than with the intent to live there. What are the requirements for the investment property? For an owner to demonstrate the status of the acquired asset as an investment, the owner needs to rent it to others at fair market value during the two years following the acquisition. The rental must be at least 14 days yearly, and the investor must show rental income on their tax return. However, the owner may also use the property on a limited basis. 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