About 1031 (Tax) Exchange for Investors

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Qualification of Vacation Homes for 1031 Exchange

A Safe Harbor
Revenue Procedure 1008-16

The Internal Revenue Service has established a safe harbor in which it will not challenge whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment for purposes of §1031 if the qualifying use standards or Revenue Procedure 1008-16 are met.

Relinquished Property ~ a dwelling unit qualifies as property held for productive use in a trade or business or for investment if:

The dwelling unit is owned by the taxpayer for a minimum of 24 months immediately before the exchange ( the "Qualifying use period" ) ; and
Within the qualifying use period, in each of the two 12-month periods immediately preceding the exchange,
1. the taxpayer rents the dwelling unit to another person at fair rental for 14 days or more,
  AND
2. the period of the taxpayer's personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period the dwelling unit is rented at fair rental.

Replacement Property ~ a dwelling unit qualifies as property held for productive use in a trade or business or for investment if:

The dwelling unit is owned by the taxpayer for a minimum of 24 months immediately after the exchange ( the "qualifying use period" ); and
Within the qualifying use period, in each of the two 12-month periods immediately after the exchange,
1. the taxpayer rents the dwelling unit to another person at fair rental for 14 days or more,
  AND
2. the period of the taxpayer's personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period the dwelling unit is rented at fair rental.

If the taxpayer files a federal income tax return reporting the transactions as a §1031 exchange and subsequently determines the qualifying use standards are not met, the taxpayer is expected to file an amended return not reporting the transaction as a §1031 exchange.

This Revenue Procedure was established strictly to determine whether a dwelling unit qualifies as property held for productive use in a trade of business or for investment under §1031. All other requirements of §1031 must be satisfied.

-For additional information regarding personal use of investment property, refer to IRS Publication 527-
Available at http://www.ire.gov/formspubs/index.html

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