Ted and Marvin Brown purchased an apartment building in 2003 as equal tenants in common. After a hectic decade of co-ownership, the brothers decided that their business association should be terminated. This led to the sale of the apartment building and a division of the proceeds.

The realized gain on the sale of the apartment building for each brother was $350,000. Ted recognized gain on his share and used the net proceeds to invest in stock. Marvin wanted to defer any recognized gain, so he worked with a realtor to identify property that would be eligible for § 1031 like-kind exchange treatment. After one prospect failed, the realtor identified a single-family home on Lake Tahoe that was currently being rented by the owner. Marvin agreed with the choice and acquired the single-family house using the proceeds from the apartment building. Because the single-family house qualified as like-kind property, Marvin deferred all of his realized gain.

After attempting to rent the property for eight months without success, Marvin concluded that he could not continue to make the mortgage payments on his primary residence and this rental property. To ease his financial liquidity problem, Marvin sold his principal residence for a realized gain of $190,000 and moved into the Lake Tahoe house. He reported no recognized gain on the sale of his principal residence as the sale qualified for § 121 exclusion treatment.

The IRS issued a deficiency notice to Marvin associated with the sale of the apartment building. The position of the IRS was that Marvin did not hold the single-family residence for investment purposes as required by § 1031. Instead, his intention was personal-to use it as a replacement for his current residence that he planned on selling. Who should prevail?