Vacation Homes and IRC Section 1031 Exchanges

Vacation homes or “second homes” offer another opportunity for the 1031 Exchange. Often a taxpayer’s best investment has been his vacation home and yet many tax and legal experts have argued against section 1031 when it came time to sell.

Good news. In February of 2008, the IRS established guidelines for determining whether a vacation home qualifies for a 1031 Exchange. Although exchanges of second homes have been done for years, we now have the definitive ability to say, Yes, they can qualify!

Revenue Procedure 2008-16 sets forth the safe harbor guidelines as follows.

RELINQUISHED PROPERTY

  1. The holding period for the vacation home is at least 24 months immediately before the exchange;
  2. For each of the two 12-month periods, the vacation home is rented to another person at a fair rental for 14 days or more; and
  3. The homeowner limits his use of the vacation home to not more than 14 days or 10% of the number of days during the 12-month period that the vacation home is rented at a fair rental value.

 

REPLACEMENT PROPERTY

  1. The holding period following the exchange is at least 24 months;
  2. For each of the two 12-month periods, the vacation home is rented to another person at a fair rental for 14 days or more; and
  3. The homeowner limits his use of the vacation home to not more than 14 days or 10% of the number of days during the 12-month period that the vacation home is rented at a fair rental value.