1031 Tax Exchange ( Vacation/ 2nd homes)

****Courtesy of the Western Upstate Assoc. of Realtors***

1031 and Vacation Homes Rev Proc 2008-16
Can you do a 1031 Exchanges on a Vacation Home?
Taxpayers wanting to defer taxes on a vacation home through a Section 1031 like-kind exchange have
contended with incomplete guidelines for many years. A 1031 Exchange allows taxpayers to sell "business
or investment" property and purchase replacement property within the current regulations and have the
opportunity to defer or eliminate all the Federal and State Taxes. The current tax law will only allow you
to use Section 1031 for assets "held" either "for use in a trade or business" or "for investment." Property
that is held for personal use like a pure second home usually did not qualify. On February 15, 2008, the IRS
released Revenue Procedure 2008-16.
The IRS has never given guidance on how to handle these dual properties that have both personal and
investment use. Most vacation homes were rented, but no one knew how much personal use was allowed.
With Revenue Procedure 2008-16, the IRS will allow a vacation home to qualify for a Section 1031
exchange if the following conditions are met:
For the relinquished property
• You have owned it at least 24 months before the exchange
• In each of the two 12-month periods prior to the exchange the property has been rented at fair
value for 14 days or more
• The taxpayer's personal use of the property during the prior two 12-month periods doesn't
exceed the greater of 14 days, or-10% of the number of days during the periods that the
property is rented at a fair rental rate.
As with any 1031 exchange the replacement property must also qualify for business or investment property
test. The new Revenue Procedure will allow the property to qualify for 1031 exchange if the property is
held for at least 24 months after the exchange. Also the personal use and rental for the two 12 subsequent
12 month periods meet the same 14 day/10% test that hold for the property given up.
Please note that the Revenue Procedure is a just a Safe Harbor or guideline. The Safe Harbor means that if
you follow these rules your exchange will not fall under IRS scrutiny. If you do not meet these rules exactly
it does not preclude your exchange from qualifying.
Check with your tax attorney or 1031 Exchange Facilitator for more information.