Q3: Can the replacement property eventually be converted to the taxpayer's primary residence or a vacation home?
Yes, but the holding requirements of Section 1031 must be met prior to changing the primary use of the property. The IRS has no specific regulations on holding periods except when exchanging with a related party. However, many experts feel that to be on the safe side, the taxpayer should hold the replacement property for a proper use for a period of at least one year. If the owner later on wants to take advantage of the home owner’s exemption (up to $250,000 or $500,000 for a couple), there is now a five year holding period requirement.