1031 Exchange Topics

Do Vacation and Second Homes Qualify?

It has been established that vacation or second homes held by the Exchanger primarily for personal use do not qualify for tax deferred exchange treatment under IRC §1031. In Moore v. Commissioner, T.C. Memo 2007-134, the Tax Court held that properties held for personal use with the mere hope or expectation of gain did not establish investment intent for a vacation home used only for the personal enjoyment of the taxpayer and his family and friends.

Revenue Procedure 2008-16, provides safe harbors under which the IRS will not challenge whether a dwelling unit qualifies as property held for use in a trade or business or for investment purposes. A dwelling unit is defined as “real property improved with a house, apartment, condominium, or similar improvement that provides basic living accommodations including sleeping space, bathroom and cooking facilities.”

The safe harbor for a vacation or second home to qualify as Relinquished Property in a §1031 exchange requires the Exchanger to have owned it for twenty-four months immediately before the exchange, and within each of those two 12-month periods the Exchanger must have 1) rented the unit at fair market rental for fourteen or more days, and 2) restricted personal use to the greater of fourteen days or ten percent of the number of days that it was rented at fair market rental within that 12-month period.

The safe harbor for a vacation or second home to qualify as Replacement Property in a §1031 exchange requires the Exchanger to own the vacation home for twenty-four months immediately after the exchange, and for each of those two 12-month periods the Exchanger must 1) rent the unit at fair market rental for fourteen or more days, and 2) restrict personal use to the greater of fourteen days or ten percent of the number of days it was rented at fair market rental within that 12-month period.

“Personal use” includes use by the Exchanger’s friends and family members that do not pay fair market value rent, but would not include use as a related party’s primary residence if the related party pays rent at a fair market rate. Adams v. C.I.R., T.C. M. 2013-7.

CLICK TO DOWNLOAD TOPIC PDF

For more information read:
Revenue Procedure 2008-16
How to Buy Your Vacation Home with a 1031 Exchange
How to Buy Your Dream Home with a 1031 Exchange

Locate a 1031 Expert In Your Area

Recent Posts

Can You Change Spousal Ownership in a 1031 Exchange?

Will Adding/Deleting My Spouse Impact My 1031 Exchange?Generally, no changes should be made to the way title to property is held shortly before or after property is sold/purchased via a 1031 Exchange. For example, if title to an apartment building is held by Lisa and...

1031 Update on Capitol Hill – April 2024

1031 Coalition Letter & DC Fly-In​ April 17, 2024 IPX1031, in conjunction with our industry trade organization the Federation of Exchange Accommodators (FEA), worked with the Real Estate Roundtable to circulate an updated 1031 Coalition letter to leaders of...

The Build to Suit Exchange

The build-to-suit exchange, also referred to as a construction or improvement exchange, gives the Exchanger the opportunity to use all or part of the exchange funds for construction, renovations or new improvements to the Replacement Property.

1031 Update on Capitol Hill – March 2024

Biden Releases FY2025 Budget Proposal March 14, 2024 Consistent with its prior budget proposals, the Biden Administration has proposed capping the gain that can be deferred through a like kind exchange at $500,000 per taxpayer ($1,000,000 for a married couple filing...

Pin It on Pinterest