Can a Relative Live in My Rental or Investment Property?

This is actually a fairly common question. Can a taxpayer sell rental or investment property and acquire another rental or investment property through a 1031 tax deferred exchange and still qualify for tax deferred exchange treatment if a relative lives in the newly acquired property? The answer is fairly straight forward.

Treat it as Rental or Investment Property
The key is that the acquired property must be rental or investment property or used in your trade or business in order to qualify as like kind property. So, as long as the related party is paying the taxpayer fair market rent just like any other tenant would pay, it will qualify as like kind replacement property for tax deferred exchange treatment.

Risk of Being Recharacterized as a Second Home
There will be risk that the acquired property would be recharacterized or reclassified as a second home or vacation home instead of rental or investment property if the related party does not pay fair market rent to the taxpayer.

Vacation Property or Second Home
It is possible for a property held and used as your vacation property or your second home to qualify for tax deferred exchange treatment. It depends on a number of factors. The IRS also provided certain "Safe Harbors" for situations like this. I just recently posted a blog on this subject.