Make Vacation Property 1031 Exchange Eligible
Posted by Andy Gustafson on Thu, Jun 17, 2010
Effective March 10, 2008, the Internal Revenue Service (IRS) instituted Revenue Procedure 2008-16 providing clarification when a vacation home is and is not eligible for 1031 consideration. For years this was a gray area. Unfortunately, without the IRS guidance, the rules were subject to interpretation which led to abuse.
Vacation homes can be exchanged in a 1031 tax deferred exchange when:
- the old or relinquished property is held for two years;
- in each of those two years, the property is rented out 14 overnights at fair market rent;
- personal use can not exceed fourteen overnights or 10% of the overnights rented per year;
- the overnight is not counted towards the fourteen per year if performing maintenance on the property.
If the replacement property is also a like-kind vacation home, it must also follow the same two year, fourteen overnight, rents at fair market rate and limited personal use.
A fact supporting the proper intent is to:
- Report the property on Schedule E with rental revenues, expenses and depreciation taken.
Ask your CPA whether the property qualifies for a 1031 exchange. If the property does not qualify consider changing the character by following the stipulated guidelines for two years. If the association policy prohibits rentals, then the remaining factors must substantially support the Revenue Procedure. Once again, seek the counsel of your CPA and or real estate attorney.
Do you own a rental property and are considering selling?
