Like-Kind Exchange of Vacation Homes Under I.R.S. Section 1031
ATTORNEYS’ TITLE INSURANCE FUND, INC.
February 25, 2008
**** FUND NEWS ****
The following is a summary of new I.R.S. safe harbor regulations for the exchange of vacation homes from ATTORNEYS’ TITLE INSURANCE FUND INC.
The Internal Revenue Service (“IRS”) has just released safe harbor regulations, effective March 10, 2008, which provide guidance on the exchange of dwelling units such as vacation homes. These safe harbor regulations are summarized below. Transactions completed under these rules will not be challenged by the IRS as to whether a dwelling unit qualifies under Section 1031 as property held for productive use in a trade or business or for investment. However, taxpayers are not generally required to take advantage of any of the various safe harbor rules offered by the IRS. Therefore exchanges of dwelling units may still be completed outside of this safe harbor; but in that event, it should be brought to the taxpayer’s attention that an exchange outside of the safe harbor may have greater risk of being disallowed by the IRS.
In summary, the safe harbor rules require the dwelling unit to be relinquished (sold) in the exchange to have been owned by the taxpayer for at least 24 months before the exchange and that the property acquired in the exchange (replacement property) be owned by the taxpayer for at least 24 months following the exchange. As to each property, the taxpayer must have rented the dwelling unit to other persons at fair market rent for 14 days or more in each of the two 12-month periods immediately preceding the exchange (as to the relinquished property), or each of the two 12-month periods immediately following the exchange (as to the replacement property). In addition, the taxpayer’s personal use of either unit may not exceed the greater of 14 days or 10% of the number of days of rental in each period (although some additional use by the taxpayer over and above this restriction may be allowed for repairs and annual maintenance).
The rental requirement is not satisfied by rental to family members unless the unit is used as a “principal” residence (and not as a vacation home) and the family member pays fair market rent.
Your Suncoasteam attempts to keep you informed of tax information that affects your homes and investments.
James B. Mulligan, Licensed Real Estate Broker
PO Box 380503
Murdock, FL 33938
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