The taxpayer bought a house in San Francisco in 1963 for $26,000, lived in it for a number of years, and then moved out and rented it from 1979-2003. In 2004, the taxpayer sold the house for $572,000 and found a replacement rental property to qualify as an IRC Sec. 1031 exchange. The new property was in Eureka, CA, where the taxpayer's son and family lived. The five bedroom home required extensive renovation, which was performed by the son, who then moved his family in, and paid a monthly rent of $1,200. The IRS claimed that the Eureka house was acquired for personal purposes (i.e., to let the taxpayer's son and family live there for below market rent), and did not qualify for Section 1031 treatment. The Tax Court held that the Eureka home was purchased "for investment," and the transactions constituted a valid exchange. The monthly rent of $1,200 was a fair rental value since the son and his family assumed substantial responsibilities for renovating and repairing the house. William Adams , TC Memo 2013-7 (Tax Ct.).
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