The IRS Provides Guidance on Exchange of Vacation Homes

The following is provided by Asset Exchange Company www.AX1031.com

The IRS recently issued Revenue Procedure 2008-16 which provides a safe harbor under which the IRS will not challenge whether a vacation property qualifies for a 1031 Exchange. To summarize the Revenue Procedure, a vacation property can qualify for a 1031 Exchange if the taxpayer has owned the property for 24 months and each year:

· The taxpayer rents the property to another person at a fair market rental rate for 14 days or more, and

· The taxpayer's personal use of the property does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the property is rented at a fair market rental rate.

Please note that both of the requirements must be met in order for a vacation home to qualify for an exchange. Examples of vacation properties owned for two years and used in the following manner that qualify for 1031 Exchange include:

· A vacation home in Tahoe that is rented out for 14 days/year, and used by the owner for 14 days/year.

· A Santa Cruz beach house that is rented for 300 days/year, and used by the owner for 30 days/year.

· A vacation home in Vail that is rented for 14 days/year and left vacant the rest of the time.

When determining if a property was rented for "fair market rent" the IRS will look at all facts and circumstances that exist when the rental agreement is entered into. It is good business practice to always maintain copies of all rental agreements as wells as records of comparable rental properties.

When determining whether a property is used for personal use, the IRS will take a broad definition so it is always advisable to consult with a tax advisor regarding these matters.