Website design By BotEap.comWe are often asked if the tax liability for the sale of a vacation home can be deferred using IRC section 1031 procedures. The answer to this question is found in the 2008-16 Admissions Procedure.

Website design By BotEap.comThe general rule of thumb for ALL 1031 exchanges is that the property must be held primarily for investment or use in trade or business. To prove that your vacation home is held primarily for investment, and therefore 1031-eligible, rather than for your personal use, the IRS has set specific parameters you must follow. This is known as a “safe harbor.” Those parameters are:

Website design By BotEap.comFor Relinquished or Old Vacation Ownership you must have:

Website design By BotEap.comYou owned the property for at least two years, and;

Website design By BotEap.comIn each of those two years, the property must have been rented for 14 days or more at the fair market rate.

Website design By BotEap.comFor Replacement or New Vacation Ownership

Website design By BotEap.comYou owned the property for at least two years, and;

Website design By BotEap.comIn each of those two years, the property must have been rented for 14 days or more at the fair market rate.

Website design By BotEap.comIn addition to these “safe harbor” requirements, there are additional requirements:

Website design By BotEap.comYour own use of the 1031 exchange vacation homes must not exceed 14 nights or 10% of the days rented per year, whichever is less, but not including time spent on the property for repairs and maintenance.

Website design By BotEap.comThe term “safe harbor” means that the IRS will not contest your 1031 tax deferral claim if you can prove these facts. The burden of proof always falls on the taxpayer. If you exchange 1031 vacation homes and cannot prove these precise facts, your 1031 exchange may still be honored. But it will be subject to increased scrutiny by the IRS. When you do not meet the “safe harbor” test, you can still prove investment intent by other facts and circumstances. Some of the best ways to demonstrate investment intent are:

Website design By BotEap.comKeep an analysis of the investment potential of the property when you buy it. Market trends and resale potential are important parts of this analysis,

Website design By BotEap.comList your vacation home on your tax return under your Schedule E,

Website design By BotEap.comTake the depreciation,

Website design By BotEap.comShow property income,

Website design By BotEap.comKeep track of your personal usage time, and remember that time spent on repair and maintenance does not count as personal usage time.

Website design By BotEap.comMake improvements to the property that will maximize your investment potential,

Website design By BotEap.comDo not include the property on Schedule A of your tax return.

Website design By BotEap.comShowing why you sold the property in less than two years makes sense from an investment standpoint.

Website design By BotEap.comNote that where advance planning is possible, most taxpayers convert their personal-use vacation property to property held primarily for investment under the above safe harbor rules before making a 1031 exchange. A Second Home it can be converted to an investment property, changing the character by placing the property in a rental pool, reducing personal use, and itemizing the property on Schedule E on the tax return.

Website design By BotEap.comVacation properties held in a 1031 exchange may be converted to a primary residence, in which case it may qualify for tax exemption under IRC section 121. A second home can be converted to an investment property by changing the character by placing the property in a rental pool, reducing personal use, and itemizing the property on Schedule E of the tax return.

Website design By BotEap.comAll other section 1031 exchange requirements apply to vacation home exchanges.

Website design By BotEap.comBy,
ESQ Steven Hickox