Well if you play by the rules it can work....and rev rule 2008-16 sets a 2 year brite line standard...do it in two months the IRS may eat a you for breakfast and toss in abuse penalities...see Goolsby v Comm TC Memo 2010-64 I don't know if new rules tightened up anything
You are misreading the rules a bit. The taxpayer must have a real intent to hold the property as investment property at the time the exchange is completed. If the taxpayer has a plan to convert the acquired property to personal use at the time he or she does the exchange then it does not qualify. The very case you cited tells you that:
A taxpayer's intent to hold a property for productive use in a trade or business or for investment is a question of fact that must be determined at the time of the exchange. Bolker v. Commissioner, 81 T.C. 782, 804, 1983 WL 14892 (1983), affd. 760 F.2d 1039 (9th Cir.1985); Click v. Commissioner, 78 T.C. 225, 231, 1982 WL 11189 (1982). Taxpayers bear the burden of proving that they had the requisite investment intent. Click v. Commissioner, supra at 231; Regals Realty Co. v. Commissioner, 43 B.T.A. 194, 208 (1940), affd. 127 F.2d 931 (2d Cir.1942). We have held that investment intent must be the taxpayer's primary motivation for holding the exchanged property in order for the property to qualify as held for investment purposes of section 1031. Moore v. Commissioner, T.C. Memo.2007–134. The use of property solely as a personal residence is antithetical to its being held for investment. Starker v. United States, 602 F.2d 1341, 1350–1351 (9th Cir.1979).
Goolsby v. Commissioner, 99 T.C.M. (CCH) 1249 (T.C. 2010).
Your citation of Rev. Rul. 2008-16 is incorrect. That ruling has nothing to do with like kind exchanges at all. It instead deals with an issue related to charitable contributions made by S-corporations. I assume you mean to cite to Rev. Proc. 2008-16 instead. That procedure does set a safe harbor for testing whether a replacement rental property acquired in an exchange will qualify for a like kind exchange. The safe harbor deals with the sitaution in which the property is both rented out and also gets some personal use. The issue there is how much personal use is too much to disqualify it. The procedure sets out a certain period of personal use that won’t blow up the exchange.
But that procedure does not override the rule that the taxpayer must intend at the time of the exchange to use it as a rental property and not a personal residence. Indeed, the ruling tells you as much by specifying that the taxpayer has to have the necessary intent to use it as a rental property at the time of the exchange as one of the requirements for qualfiying for the safe harbor. Some people in reading the procedure, including some like kind exchange promoters, overlook that part in their zeal to try to aggressively tax plan, but in doing so they are setting up their clients for potential problems with the IRS. They perhaps haven't also read the case law and other authority that helps reinforce the importance of the necessary intent.
