Linda Robinson purchased an apartment building in 2010 and decided in 2018 to sell the apartment building. She realized a gain of $400,000. Linda wanted to defer any recognized gain, so she worked with a realtor to identify property that would be eligible for 1031 like-kind exchange treatment. She found a single-family home in Dallas, TX that was currently being rented by the owner. Linda purchased the single-family house using the proceeds from the apartment building. Because the single-family house qualified as like-kind property, Linda deferred all of her realized gains.

After evicting the occupant and trying to rent the property again for ten months, Linda decided that she could not continue to make the mortgage payments on her primary residence and the rental property. To ease her financial problem, Linda sold her primary residence for a realized gain of $190,000 and moved into the Dallas house. She reported no recognized gain on the sale of her principal residence as the sale qualified for 121 exclusion treatment. The IRS issued a deficiency notice to Mary associated with the sale of the apartment building. The position of the IRS was that Linda did not hold the single-family residence for investment purposes as required by 1031. Instead, her intention was personalto use it as a replacement for her current residence that she planned on selling.

Advise her on who should prevail in the circumstances via a Client Letter after preparing sufficient information in a tax File Memorandum to support your recommendation.