It’s the middle of summer and as investors dream about lazy days on the beach, a scorching hot question often asked this time of year is whether a vacation or second home qualifies for tax deferred 1031 treatment. Many investors desire to sell their investment properties and purchase vacation houses, condominiums and townhouses that they can enjoy part of the year. If the home is used primarily for personal use, under IRC section 1031, it will not qualify. However, an investor may purchase a vacation home as part of their 1031 Exchange if specific requirements are met:
- the investor (Exchanger) must maintain ownership for a minimum of 24 months immediately AFTER the exchange
- for each of those 12-month periods, the Exchanger must:
1. rent the unit at fair market rental for 14 or more days, and
2. restrict personal use to 14 days maximum or 10% of the number of days that it was rented within each 12-month period
Details can be found in Revenue Procedure 2008-16. Keep in mind that investments of vacation properties or second homes that do not follow the safe harbor guidelines provided within Revenue Procedure may still qualify for tax-deferred treatment. It is imperative that investors consult with their tax and legal advisors to determine whether their real property qualifies for 1031 Exchange treatment. Each case is completely different and individual factors, intent and proof to support tax-deferred treatment must all be considered. And if you are thinking of a future exchange, be proactive and start your planning now.
For more information read:
• Revenue Procedure 2008-16
DISCLAIMER: The information above is based on current tax code, which is subject to change. The above information should not be considered to be tax advice. You should discuss your personal situation with your qualified tax and legal advisor.