News & Information

Until recently, there was little guidance from the Internal Revenue Service as to whether a vacation home could meet the requirements of Section 1031 of the Internal Revenue Code regarding exchanges of real estate. Revenue Procedure 2008-16 provides a safe harbor for exchanges of vacation homes. With the adoption of Rev Proc 2008-16, the IRS affirmed that it will not challenge the exchange of a vacation home (either the relinquished or replacement property) if: (1) the vacation home is held for investment purposes; (2) the taxpayer owns the vacation home for at least two-years prior to and the replacement home at least two-years after the exchange, (3) during the two year holding period (a) the taxpayer rents the vacation home at a fair rental rate for at least 14 days each year during the two-year holding period and (b) the taxpayer’s personal use of the vacation home does not exceed the greater of 14 days per year or 10% of the days that it is rented at fair-market value in a year during each of the two years of the holding period.

Whether or not a vacation home is held for investment purposes can be determined based upon looking at other sections of the Internal Revenue Code which address whether property is held for purposes of making a profit. Factors that the IRS will examine when determining whether the taxpayer has a profit making intent include: (1) whether the taxpayer acts in a business-like manner, (2) whether the taxpayer has acquired expertise in the activity; (3) the amount of time the taxpayer devotes to the activity; (4) whether the taxpayer has an expectation of appreciation of the asset; (5) whether the taxpayer has carried on similar activities in the past and the success or lack thereof of those previous activities; (6) the taxpayers history of income or loss with regard to the activity; (7) the amount of profit that is earned, if any; (8) whether the taxpayer has additional sources of income; and (9) whether the taxpayer derives any personal pleasure or recreation.

Even if a taxpayer cannot satisfy this safe harbor test, it may still be possible for the taxpayer to get 1031 exchange treatment on a vacation home. Contact the tax attorneys at Mika Meyers to discuss.