The legality of performing an IRS Section 1031 Exchange for your vacation home has always been a big gray area. The general rule for a successful 1031 exchange is that both the acquired property and the relinquished property must either be held for investment or productive use in a trade or business. While many second home owners rent their properties and technically have been holding them with the expectation of investment return, the personal use by the owner has thrown doubt as to Section 1031 qualification.
Now, according to a new release prepared by Marvin A. Kirsner, Greenberg Traurig LLP, Boca Raton, FL (561-955-7630) and forwarded to me by Jame Mikes, under this new Safe Harbor ruling, second homes would be i for 1031 exchange treatment if:
1. The property has been held for at least 2 years
2. The property as been rented at fair market rental value for at least 14 days per year during this ownership period.
3. The taxpayer’s personal use does not exceed the lesser of 14 days per year or 10% of the number of days the property is rented to others.
These safe harbor requirements apply to both the the relinquished property and the acquired property so beware: if the acquired property is not used per these regulations during the future period of ownership, the taxpayer is required to file an amended return disallowing the 1031 status!
As with all IRS rulings, there are many intricate interpretations of this new Safe Harbor so be sure to contact your personal tax consultant for advice to be certain your transaction crosses all “T’s” and dots all “I’s”. While the Safe Harbor delineates only limited personal use, it does, for the first time, provide some clarity to a question that was often interpreted many different ways.
Please feel free to contact me for a copy of Revenue Procedure 2008-16 which documents the new Safe Harbor.
John Nilsson
