Vacation Property 1031 Exchange Guidelines
Great News! The IRS will not challenge whether a vacation property qualifies for Section 1031 treatment if certain specified ownership and use requirements are met. The IRS has released Revenue Procedure 2008-16, which provides definite guidelines for a safe harbor vacation property 1031 exchange.
To meet the safe harbor requirements, a taxpayer, during the 24 months prior to the sale of his or her vacation home, or within 24 months after the purchase of their vacation property as a 1031 replacement property, must:
1) Rent the property at fair market rent for a minimum of 14 days during each 12- month period of the 24-month period.
2) Limit personal use of the property during each 12-month period of the 24-month period not to exceed the greater of 14 days or 10 percent of the number of days the property is rented at a fair market rent during each of the two 12-month periods.
The IRS defined personal use to include: the taxpayer or any other person who has an interest in the vacation property, including a tenant in common interest; use by any individual who uses the property under an arrangement which enables the taxpayer to use some other property (for example, trading vacation property use whether or not a rental is charged for the use of such other property is considered personal use); use by any member of the family of the taxpayer unless the vacation property is rented out as a primary residence at a fair market rent; and use by any other individual if rented for less than fair market rent.
Per the IRS. the fair market rent is based on all of the facts and Per the IRS, the fair market rent is based on all of the facts and circumstances that exist when the rental agreement is entered into, and all rights and obligations of the parties to the rental agreement are taken into account.
Maintenance days do not count at personal use. Some taxpayer usage is not considered as personal use if the taxpayer is engaged in repair, upkeep and annual maintenance on a substantially full-time basis for any day. The taxpayer must be ready to prove that the actual work was done.
In summary, a taxpayer can take a personal residence or a vacation home and rent it at fair market value for 14 days per year for two years and then exchange out of it. Remember that personal use must be limited during these two years.
This new revenue ruling provides a wonderful safe harbor and taxpayers must also satisfy all other requirements for a like-kind exchange under § 1031. If your vacation property does not meet all the terms of the safe harbor, it may still be possible to do a 1031 exchange, but you could be subject to heightened scrutiny. Always check with your tax advisor before engaging in any 1031 exchange.
To meet the safe harbor requirements, a taxpayer, during the 24 months prior to the sale of his or her vacation home, or within 24 months after the purchase of their vacation property as a 1031 replacement property, must:
1) Rent the property at fair market rent for a minimum of 14 days during each 12- month period of the 24-month period.
2) Limit personal use of the property during each 12-month period of the 24-month period not to exceed the greater of 14 days or 10 percent of the number of days the property is rented at a fair market rent during each of the two 12-month periods.
The IRS defined personal use to include: the taxpayer or any other person who has an interest in the vacation property, including a tenant in common interest; use by any individual who uses the property under an arrangement which enables the taxpayer to use some other property (for example, trading vacation property use whether or not a rental is charged for the use of such other property is considered personal use); use by any member of the family of the taxpayer unless the vacation property is rented out as a primary residence at a fair market rent; and use by any other individual if rented for less than fair market rent.
Per the IRS. the fair market rent is based on all of the facts and Per the IRS, the fair market rent is based on all of the facts and circumstances that exist when the rental agreement is entered into, and all rights and obligations of the parties to the rental agreement are taken into account.
Maintenance days do not count at personal use. Some taxpayer usage is not considered as personal use if the taxpayer is engaged in repair, upkeep and annual maintenance on a substantially full-time basis for any day. The taxpayer must be ready to prove that the actual work was done.
In summary, a taxpayer can take a personal residence or a vacation home and rent it at fair market value for 14 days per year for two years and then exchange out of it. Remember that personal use must be limited during these two years.
This new revenue ruling provides a wonderful safe harbor and taxpayers must also satisfy all other requirements for a like-kind exchange under § 1031. If your vacation property does not meet all the terms of the safe harbor, it may still be possible to do a 1031 exchange, but you could be subject to heightened scrutiny. Always check with your tax advisor before engaging in any 1031 exchange.
.JPG)
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