Consider the Warm Benefits of 1031s
Summer breezes. Cool mountain air. Crashing waves. Does your dream of a vacation or second home qualify for tax deferred 1031 treatment? Investors often ask if the proceeds from the sale of their investment properties will qualify and if the perfect vacation home will pass the 1031 test. The simple answer is that it will not qualify under IRC Section 1031 if the home is used primarily for personal use.
However, a vacation property may qualify as part of a 1031 Exchange if the following requirements are met. For two years after the exchange, you must:
- Rent the property at fair market value for at least 14 days each year; AND
- Use the property for personal purposes no more than 14 days each year or 10% of the actual period it is rented out each year (whichever is greater)
You may rent it to a family member if they pay fair market rent and it is their primary residence.
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. Finally, if you are considering a future exchange, be proactive and start your planning now.
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.