Vacation Homes or Second Homes & 1031 Exchanges

Rev. Proc. 2008-16

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

Though exchanges of second homes have taken place for many years 1031‘s application to such a property has been considered a grey area. But there’s 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

The holding period for the vacation home is at least 24 months immediately before the exchange;
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
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

The holding period following the exchange is at least 24 months;
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
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.

 


 

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Vacation Homes or Second Homes & 1031 Exchanges

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