The Tax Court recently held that a couple who purchased a house as investment property was entitled to Section 1031 non-recognition treatment, despite deciding to use the house as their principal residence eight months after they purchased it. In Reesink v. Commissioner, a husband and wife sold their share of an apartment building and purchased a house with the sale proceeds. The taxpayers intended to hold the house as investment property at the time of the exchange (as is required for Section 1031 non-recognition treatment), but they decided to use the house as their personal residence eight months later, thus causing the IRS to question their investment intent.
The Tax Court held in favor of the taxpayers based on their treatment of the house as investment property at the time of the exchange. The couple placed fliers throughout town where the house was located, showed the house to potential renters, and only decided to use the house as their personal residence almost eight months after the purchase. Given how the taxpayers treated the house, the Tax Court held that their sale of the apartment building and subsequent purchase of the house qualifies as a Section 1031 like-kind exchange.
The IRS relied on Goolsby v. Commissioner for its position that making the purported replacement property a personal residence causes the taxpayer to lack the requisite investment motive. The court noted that Goolsby was distinguishable because in that case, the taxpayers made their purchase of the replacement property contingent on the sale of their former personal residence, and their only rental efforts consisted of taking out a single advertisement in the local newspaper. Moreover, they moved into the replacement property within two months of purchasing it. The taxpayers in Reesink showed much more effort to rent out the property and only made the property a personal residence after eight months of failure to rent the property.







