How to Plan to Exchange Vacation Property

Exchange vacation property in Gulf Shores

Herbert Law Firm LLC can handle exchange vacation property paperwork of all kinds in the Gulf Shores area. The I.R.S. will not challenge whether a vacation property or second home qualifies for a Section 1031 Exchange if certain specified ownership and use requirements are met. The IRS released Revenue Procedure 2008-16 providing definite guidelines for a safe harbor 1031 exchange. Learn more about this type of situation below, and call us with any questions you may have about how to proceed.

Personal use

Personal use is defined as:
  • Use by the taxpayer or any other person who has an interest in the vacation or second home property, including a tenant-in-common interest.
  • Use by any individual who uses the property under an arrangement which enables the taxpayer to use some other property.
  • Use by any member of the taxpayer’s family unless the vacation property is rented out as a primary residence at a fair market rent.
  • Use by any other individual if rented for less than fair market rent.
  • Maintenance days do not count as personal use days. If the taxpayer is engaged in repair, upkeep and annual maintenance on a substantially full time basis for any day, a personal day is not claimed. The taxpayer must be ready to prove that the actual work was done and this can include overseeing a contractor that is providing the work on the property.

Safe harbor

To meet the safe harbor requirements, a taxpayer, during the 24 months prior to the sale or after the purchase of a vacation property or second home must:
  • Rent the property at fair market rent for a minimum of 14 days during each 12 month period of the 24-month period.
  • Taxpayer’s personal use of the property cannot exceed the greater of 14 days per year or 10% of the days the property is actually rented during each of the two 12-month periods before or after the 1031 exchange.

In summary

A taxpayer can take a second home or a vacation property and rent it at fair market value for 14 days per year for two years and then exchange out of it. Remember that personal use must be limited during these two years. Revenue Ruling 2008-16 provides these guidelines for a safe 1031 exchange. Taxpayers must also satisfy all other requirements for a like-kind exchange.
Call us for help! (251) 968-4764
Share by: