New IRS Ruling on Vacation Homes and 1031 Exchanges

Property owners often ask whether a property that they rent out to others but occsionally use themselves (such as a vacation home) qualifies for a tax defered exchange under § 1031.

In the past, it was not clear whether the IRS would consider such property to be “held for productive use in a trade or business or for investment” and therefore qualified for a 1031 exchange.

The IRS has issued a new Revenue Procedure (Revenue Procedure 2008-16) that explicitly provides that property that is rented to others but also occasionally used by the owners for personal purposes qualifies as property that may be exchanged in a like-kind exchange under § 1031 when certain conditions are met.

Under the new IRS ruling, which goes into effect on March 10, property that is primarily held for the production of rental income, but is also used occasionally for personal purposes, will qualify for § 1031 like-kind exchange treatment when:

(1) the dwelling has been owned by the taxpayer for at least 24 months immediately before the exchange, and

(2) the period of the taxpayer’s personal use of the dwelling does not exceed the greater of 14 days or 10 percent of the number of days that the dwelling is rented at fair market value.

One small cheer for the IRS!

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