Can you 1031 exchange out of, or into a vacation property or second home?

Until recently, the IRS guidelines for this type of exchange were fairly ambiguous and there was quite a bit of disagreement among tax experts as to whether real property held and used for personal use and enjoyment such as vacation properties or second homes could be exchanged for other investment properties.

The basic guidelines of Revenue Procedure 2008-13 provides that a vacation or second home will qualify for tax-deferred exchange treatment if:

It is owned by the taxpayer for at least 24 months immediately before the exchange ("qualifying use period"); and

Within the qualifying use period, in each of the two 12 month periods, (1) the taxpayer rents the dwelling unit at fair rental to another person for 14 days or more and (2) the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12 month period that the dwelling unit was rented at fair rental value.

A vacation or second home will qualify as like-kind replacement property if:
It is owned by the taxpayer for at least 24 months immediately following the exchange ("qualifying use period"); and

Within the qualifying use period, in each of the two 12 month periods, (1) the taxpayer rents the dwelling unit to another person at fair rental for 14 days or more and (2) the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12 month period that the dwelling unit was rented at fair rental.

A taxpayer should consult their legal and tax advisors to determine if their specific situation would qualify for a 1031 Exchange. Please feel free to contact our friendly exchange consultants for further information.

For any questions regarding any type of 1031 exchangeable properties please call 800-305-8860 or visit my website at www.scottivey.net.