Many people own rental properties in vacation locations and want the benefits of tax-deferred exchanges while still enjoying their property for personal use. However, too much personal use and not enough rental use can disqualify the property for tax-deferred treatment under Internal Revenue Code Section 1031. The Internal Revenue Service issued Revenue Procedure 2008-16, providing guidance on these issues.
The revenue procedure includes nuanced requirements that must be met to avoid the risk of losing the tax deferment benefit. For example, the taxpayer must own the relinquished and replacement properties for at least 24 months immediately before and after the exchange. Yet, in each of the 12-month periods immediately before and after the exchange, the properties must also be rented at a fair market value to an unrelated party for a minimum of 14 days. During each 12-month period, the taxpayer’s personal use cannot exceed the greater of 14 days or 10% of the days that the property was rented at fair market value to anyone other than family members (a rental to family counts toward taxpayer’s personal use unless rented at fair market value and used as their principal residence). Additional requirements define what constitutes visits to the property for maintenance and clarify what type of use by family members and other parties may count as “personal use.” The parameters can be complex, owners of vacation homes should speak with their legal /tax advisors before pursuing an exchange.
Bill Lopriore is the northeast regional manager and counsel for First American Exchange Company, LLC.
First American Exchange Company, LLC, a Qualified Intermediary, is not a financial or real estate broker, agent or salesperson, and is precluded from giving financial, real estate, tax or legal advice. Consult with your financial, real estate, tax or legal advisor about your specific circumstances.
Nothing contained in this article is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This article is intended for educational and informational purposes only.