In February of 2008 the IRS released Rev. Proc. 2008-16 (http://www.irs.gov/irb/2008-10_IRB/ar12.html) providing a safe harbor under which the IRS will not challenge whether a vacation home or a second home qualifies as property held for productive use in a trade or business or for investment for purposes of §1031 of the Internal Revenue Code. The safe harbor is effective for exchanges of dwelling units (defined below) occurring on or after March 10, 2008. The IRS will not challenge the exchange if the following qualifying use standards are met for the dwelling unit:
- Relinquished property (the dwelling unit being sold): Qualifies if: (i) the dwelling unit is owned by the taxpayer for at least 24 months immediately before the exchange; and (ii) in each of the two 12-month periods immediately preceding the exchange: (a) the taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and (b) 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 that the dwelling unit is rented at a fair rental.
- Replacement property (the dwelling unit being purchased): Qualifies if: (i) the dwelling unit is owned by the taxpayer for at least 24 months immediately after the exchange; and (ii) in each of the two 12-month periods immediately after the exchange: (a) the taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and (b) 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 that the dwelling unit is rented at a fair rental.
- Other 1031 Requirements: The taxpayer must satisfy all other requirements for a like-kind exchange under § 1031 and the regulations thereunder.
For purposes of Rev. Proc. 2008-16, the term “dwelling unit” is defined as “real property improved with a house, apartment, condominium, or similar improvement that provides basic living accommodations including sleeping space, bathroom and cooking facilities”.
For additional information from the IRS on 1031 Exchanges, please see IRS Publication 544 - Sales and Other Dispositions of Assets (http://www.irs.gov/pub/irs-pdf/p544.pdf).
If you are interested in receiving additional information about Knight-Barry's 1031 services, please contact Kristine Pavich in our Milwaukee office (414-727-4545). |
