1031 Question

Section 1031(b) says,

"if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property." Since your transaction includes not only property "permitted ... to be received" and also "other property" it's pretty clear to me that it should still qualify. My question is whether 100% would qualify. If he's required by law to be a resident manager then he still holds the entire thing for "productive use in a trade or business or for investment". The rule used to be at least that if he were an employee and he lived there under those circumstances the value of his rent would be tax free since he'd be there for the convenience of his employer. So I think he'd have an argument that he wouldn't have to recognize anything at the moment. But I haven't researched the topic, either. Stu

It should not invalidate the exchange, but any part of the B&B that is not treated as being "used for business" under IRC 280A would have to be treated as boot in the exchange. This means only the areas used "regularly and exclusively" could qualify. The guest rooms should not be a problem. An office used for administrative tasks could qualify. A guest bathroom, dining room or sitting room could also qualify -- if they are not used by the owners. Furthermore, the kitchen, pantry, laundry room and most of the hallways would not qualify as they are used by the owners for both business as well as personal purposes and fail the exclusive use test. You may want to look at the MSSP on B&B's to see the IRS' view of what constitutes "business use." It seems to be missing from the IRS website, but it can be found here: