Can the Business Use of a Property Be Terminated After a 1031 Exchange?

 Posted on January 23, 2026 in Taxation Law

People who own real estate property that is used for business purposes or investments may need to determine what steps they can take to minimize the taxes they will be required to pay. When selling these properties, a procedure known as a 1031 exchange may be used to defer capital gains taxes. However, specific steps will need to be taken in these cases, and questions may arise about how property may be used after a 1031 exchange.

Specifically, property owners may be unsure about whether they can stop using a property for business purposes and convert it to personal property and how doing so may affect the taxes they will be required to pay. This may be a concern for owners of rental properties who wish to stop renting and begin using the properties for personal purposes. By understanding how the tax laws address these situations, property owners and investors can take steps to avoid or mitigate penalties and minimize potential taxes. An experienced attorney can provide guidance on the applicable tax laws that apply to 1031 exchanges and similar situations.

Understanding 1031 Exchanges

A property owner who sells an investment property or another property used for business purposes will typically be required to pay capital gains taxes on any gain they received due to the increase in the value of the property during their ownership. However, Section 1031 of the Internal Revenue Code allows capital gains taxes to be deferred if the proceeds earned from the sale are reinvested into one or more similar properties. This is known as a 1031 exchange.

A 1031 exchange is also known as a like-kind exchange, meaning that the property being sold and the replacement property must be of a similar nature. In general, most real estate property used for business or investment purposes within the United States will qualify for like-kind exchanges. Specific procedures must be followed, and time limits must be met when completing a 1031 exchange. A 1031 exchange must be reported to the IRS using Form 8824. Failure to follow the correct procedures could lead to a person being held liable for taxes, penalties, and interest related to the transaction(s).

Termination of Business Use of 1031 Property

In certain cases, property owners who have completed a 1031 exchange may wish to stop using a property for business purposes and convert it to personal property. For example, a person who purchases a vacation home may wish to stop renting the property and begin using it for themselves. In these situations, property owners will need to be aware of the requirements that they will need to meet to avoid or mitigate potential tax penalties.

IRS Revenue Procedure 2008-16 provides a safe harbor that allows for personal use of a property within the first 2 years after a 1031 exchange. If certain requirements are met, the IRS will not challenge whether the property is being used for business purposes.

The 24 months after a 1031 exchange are known as the "qualifying use period." During this time, the property owner is required to rent the property to tenants for at least 14 days in each 12-month period. They may also use the property for personal use during this period, but their personal use should not exceed either 14 days or 10% of the total number of days the property has been rented, whichever is greater. For example, if a property is rented for 300 days during a year, the owner may use the property for personal purposes for up to 30 days.

After 2 years have passed since the 1031 exchange, the owner may stop using the property for business purposes, as long as they have met the applicable requirements during the qualifying use period. To avoid potential tax-related concerns, property owners can take steps to document that the property was rented at fair market value during the qualifying use period and report rental income on their tax returns.

Contact Our San Jose, CA Tax Compliance Lawyer

1031 exchanges can be complicated, and property owners will need to make sure to follow the correct procedures and meet all requirements put in place by the IRS. At John D. Teter Law Offices, our San Jose tax attorney can help property owners complete 1031 exchanges correctly and provide guidance on when the business use of a property can be terminated and when a rental property may be converted to personal property. Contact us at 408-866-1810 to discuss these issues in a consultation.