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 Many tax advisors have difficulty providing concise advice to clients wishing to exchange their vacation or second home. Tax advisors like clear-cut, black and white solutions and those types of answers are often difficult to provide with respect to second/vacation homes. Nonetheless, vacation homes remain the subject of many 1031 exchanges. With offices near vacation areas such as Sunriver, OR, Park City and St. George, UT, Jackson, WY, Lake Tahoe, CA, and Whitefish, MT, Summit’s experience and expertise in advising clients on vacation home exchanges is unmatched in the 1031 industry.
When evaluating a potential vacation home exchange, the crucial inquiry is to determine whether the primary intent of the client for owning and holding the property was investment/business purposes or personal use and enjoyment. It is important to remember that the taxpayer will have the burden to prove their intent. Based on numerous court decisions and pronouncements from IRS, the best fact pattern will involve an owner that has a history of renting the property at fair value on a regular basis, and that has minimized their personal use. However, each case will turn on its own particular facts which much be carefully analyzed.
Recently, the IRS has provided a safe harbor upon which conservative taxpayers and their advisors can rely. Pursuant to Rev. Proc. 2008-16, the IRS will not challenge the issue of whether a property is held primarily for investment purposes if the exchanger:
1. Has owned the property for at least two years prior to sale.
2. Has rented the property at fair value to unrelated parties for at least 14 days in each of the two years prior to sale, and has not personally occupied the property for reasons other than maintenance* for more than 14 days during each of the prior two years, which usage also includes that of family members; and
3. Meets requirements 1 and 2, above, with respect to the replacement property acquired in the exchange as well.
While vacation home exchanges can and will continue to be accomplished outside of the safe harbor of Rev. Proc. 2008-16, it provides a fallback position which will be useful for many taxpayers and their advisors. Outside the provisions of the safe harbor, taxpayers will continue their ability to exchange second homes, but will be wise to establish a fact pattern which involves renting the home to third parties on a basis which is in excess of their personal usage. Likewise, it may also be possible for taxpayers to exchange a portion of a second home by apportioning their ownership between personal and rental usage over their ownership period of the property.
In any event, a taxpayer wishing to exchange a second/vacation home should contact one of the professional advisors at Summit early in their planning process to discuss their particular facts, and take advantage of any planning opportunities that may be available.
*the determination of whether a particular day’s activity can be attributed to maintenance is a technical discussion based on the current tax laws, and should be discussed with your tax advisor(s) or one of Summit’s exchange professionals.
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