Subject:  1031 exchange in Southern California
From:  Mr. and Mrs. Marx
Date:  Wed, 30 Oct 2002

Dear Mr. Gray,

In August of 2001 my wife & I purchased a replacement property for a 1031 exchange. At the time we had planned to hold the replacement property and possibly keep moving up to bigger and more profitable properties to help us with our retirement in a few years. Then, one month later September 11^th happened.

We had stretched ourselves to the limit to buy this property, so with the financial impact of September 11^th, we decided we would be safest to sell our living residence. We have since been renting an apartment for ourselves while keeping tenants in our new property. Our tenants are going to be vacating our rental property at the end of December and we would like to move into it in January. Our question is twofold:

• Under the circumstances, would there be any tax consequences?
• What is the process for converting our rental property into our personal residence?

If this is too complex for you to answer "pro bono", we understand, & please let us know what your consultation fee is.

We appreciate any advice you could offer us! By the way, your web site is excellent.

Thank you--

Mr. and Mrs. Marx

Answer

Date:  Fri, 01 Nov 2002

Hello Mr. and Mrs. Marx,

Under the circumstances you have described to me, no tax should result from converting the property to your principal residence.

To convert the property to your principal residence, simply move in, claim the homeowner's exemption, register to vote, and notify the post office and others that this is your residence.

Warning to other readers – you can't simply exchange from an investment property to a personal residence. Get advice from a tax advisor when you are planning a tax-deferred exchange.

Good luck!
Mike Gray

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