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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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Unless otherwise stated square footage and lot dimensions appearing herein are
derived from county records and may or may not be accurate.
If square footage is material to a transaction a survey or other measurement is
recommended. This information deemed reliable but not guaranteed. Current or
previous year’s taxes may not accurately forecast future property taxes.
Property taxes can increase from one year to the next for various reasons.
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