As a qualified intermediary for 1031 exchanges, we often receive inquiries from taxpayers who have used a property for both personal and business purposes and are curious about their eligibility for a like-kind exchange.
The short answer is yes, it is possible to exchange a property that has been used for both personal and business purposes, but there are some important factors to consider.
First and foremost, the property must meet the basic requirements for a 1031 exchange, which means that it must be held for investment, productive use in a trade or business, or held for rental purposes. If the property satisfies these requirements, it may be eligible for exchange, regardless of whether it was used for personal purposes as well.
However, if the taxpayer has used the property for personal purposes, the exchange may be subject to some restrictions. Specifically, any personal use of the property must be taken into account when determining the taxpayer’s basis in the property. This means that the portion of the basis that is attributable to personal use may not be eligible for tax deferral in the exchange.
To determine the portion of the basis that is attributable to personal use, the taxpayer must calculate the percentage of time that the property was used for personal purposes, compared to the total time that it was owned. For example, if a property was owned for 10 years and used for personal purposes for 2 years, then 20% of the basis would be attributable to personal use. Another example would be if a property was used 60% for business and 40% for personal use, the taxpayer can exchange the 60% portion of the property used for business.
In summary, it is possible to exchange a property that has been used for both personal and business purposes, but the exchange may be subject to some restrictions based on the percentage of time that the property was used for personal purposes. If you have any questions about your specific situation, we encourage you to consult with a qualified intermediary or tax professional.