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VACATION HOMES: "DO THEY QUALIFY FOR
TAX DEFERRAL UNDER IRC §1031?"
THE OPPORTUNITY EXISTS FOR SUCCESSFUL VACATION/SECOND HOME §1031
EXCHANGES
Property owners throughout the nation are obtaining the benefit of full
reinvestment of equity under Internal Revenue Code §1031. Many investors
exchange out of a single family rental, duplex, or any other type of
investment property and into a vacation/second home. Many tax/legal
advisors believe it is possible to perform an exchange on a vacation
property which has no rental history but which still can be considered
"held for investment."
SUPPORT FOR VACATION HOME EXCHANGES?
In Private Letter Ruling (PLR) 8103117, the IRS did allow for tax deferral
when a property owner intended to acquire property for personal enjoyment
and as an investment. As stated in this PLR, "...the house and lot
you acquire in this trade will be held for the same purposes as the
properties exchanged: to provide for personal enjoyment and to make a
sound real estate investment." Although a PLR only applies to the
facts and circumstances in a particular individual's specific situation,
it appears, in this instance, that "personal enjoyment" of a
property does not prevent a property owner from benefiting from a tax
deferred exchange.
EACH INDIVIDUAL CASE MUST BE REVIEWED
Note: There are no regulations, statutes, or court cases which give a
definitive answer on the exchange of vacation/2nd homes. Each exchange
must be reviewed on a case-by-case basis. To qualify for an exchange, the
property owner should be able to support that the property was "held
for investment."
A BRIEF ANALYSIS
IRC Section 1031 provides for the non-recognition of gain on the exchange
of property "held for productive use in a trade or business or for
investment." Is a vacation property considered "held for
investment?"
Reg. 1.1031(a)-1(b) states in the definition of "like-kind" that
"unproductive real estate held by one other than a dealer for future
use or future realization of the increment in value is held for investment
and not primarily for sale." It appears that even property owners who
have never rented their vacation property but can substantiate that they
acquired and held the property because they expected it to increase in
value (a wise investment decision) may qualify for a §1031 tax deferred
exchange. IRC §165 and IRC §280, which address when losses may be
deducted on vacation homes, may provide additional guidance to investors.
It is a well known fact that many vacation areas have appreciated
significantly in recent years and that often property owners purchase
properties with the future appreciation in mind. A real estate investor
should consult with their own advisors to discuss their specific situation
and see if they may qualify for the benefits of a tax deferred exchange.
Back to Table of Contents 1031
Exchange Information
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