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.
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
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Hi there! When it comes to 1031 exchanges and the intricacies of tax-deferred treatment under IRC §1031, you've stepped into my wheelhouse. I'm no stranger to the likes of Moore v. Commissioner and Revenue Procedure 2008-16, and I'll tell you why.
In the case of Moore v. Commissioner, T.C. Memo 2007-134, the Tax Court emphasized that personal use alone doesn't cut it for tax-deferred exchange treatment. Properties held for personal use, even with the hope of gain, need to establish a clear investment intent. In other words, the vacation home must serve a dual purpose—personal enjoyment and investment.
Now, let's dive into the safe harbors provided by Revenue Procedure 2008-16. This gem outlines conditions under which the IRS won't challenge the classification of a dwelling unit as property held for trade, business, or investment purposes. A dwelling unit, defined as real property with basic living accommodations, includes houses, apartments, condominiums, or similar improvements.
For a vacation or second home to qualify as Relinquished Property in a §1031 exchange, the Exchanger must have owned it for twenty-four months immediately before the exchange. Within each of those two 12-month periods, the Exchanger needs to have rented the unit for fourteen or more days and restricted personal use to the greater of fourteen days or ten percent of the rental period.
Now, let's talk Replacement Property. To qualify, the Exchanger must own the vacation home for twenty-four months immediately after the exchange. Similarly, within each of those two 12-month periods, they must rent the unit for fourteen or more days and limit personal use to the greater of fourteen days or ten percent of the rental period.
And here's a crucial detail—“personal use” includes usage by friends and family at non-fair market value rent, but it doesn't cover usage as a related party's primary residence if the related party pays fair market rent. Adams v. C.I.R., T.C. M. 2013-7 settles that debate.
For anyone thirsty for more knowledge, the references at the end of the article—Revenue Procedure 2008-16, How to Buy Your Vacation Home with a 1031 Exchange, and How to Buy Your Dream Home with a 1031 Exchange—are excellent resources to explore the depths of 1031 exchanges. In the world of real estate and tax strategies, it pays to be well-versed.
