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Subject: 1031 Exchanges & Residences

Dear Forbes:

Your short article on using 1031 exchanges to acquire a new residence (6/14/99, Page 356-357) was interesting. I have longed worked with clients playing this "conversion game." However, Ms. Androshick included a widely held misconception regarding the rental requirement for the replacement property. Having handled hundreds of such exchanges for clients, I am intimately familiar with the proper rules.

In July of 1989, the House of Representatives did pass legislation requiring that the newly acquired property be used as rental for at least a year before being converted to a personal residence in order to maintain a valid 1031 exchange. This was very widely publicized for four month, along with another provision of that same law, to more narrowly define "like-kind" for real estate. However, when the Senate worked on the legislation, and the final version was sent for the President's signature, in November 1989, both of these provisions disappeared. Even though it has been almost 10 years, there are still too many people around the country who believe that both of those restrictions on 1031 exchanges were actually enacted into law.

While renting for more than 12 months would be a good indicator of a valid replacement property, the actual requirement for renting out the new property is for "a reasonable length of time." The fights ensue based on the definition of what constitutes "reasonable." Having successfully defended cases with just a few weeks of such usage, I know that, more important than the actual length of time, is the investor's intention for the property at the time of its acquisition. If it was intended to be used for rental, business or investment purposes at the time of the exchange, there is no formal time requirement in the tax code before the investors can change their minds and occupy the property themselves.