03.19.2001 :: Real Estate News
To Qualify or Not to Qualify - Vacation Homes and the 1031 Exchange
by Rodney Fitzpatrick

A vacation home can qualify for a 1031 exchange under certain situations. There are two basic views on how this can be accomplished.

There is no question that a rental property used fewer than 14 days a year by the owner and rented out the rest of the year, is investment property and qualifies for a 1031 exchange. But what if a vacation home is not rented out, but is held and used only by the owner? Can it qualify for a1031 exchange? There is no direction given from the Internal Revenue Service regarding this matter. There are two potential ways of looking at this.

The first point argues that the property falls within the definition of "Like kind" property under IRS Reg. 1.1031(a)1(b). In part it states, "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". Therefore property that is not rented out qualify for a 1031 exchange.

The opposite view argues that 280A of the code, which governs the deductibility of losses from a vacation or second home serves as the precedent. Section 280A provides that a taxpayer may not deduct losses with respect to a dwelling unit used as a residence by them during the taxable year. The code defines a dwelling unit as a residence if a taxpayer uses the unit for personal purposes for a number of days that exceeds the greater of 14 days or 10 percent of the number of days during the year for which the unit is rented for fair market value.

If section 280A does not limit the application of section 1031 to vacation homes, then some experts may also point to section 165 as another potential disqualifier. The general rule under IRC Section 165 is that losses may be deducted if the transaction was entered into for profit. A profitable sale must be the primary motive, not the secondary motive.

So, in the final analysis a taxpayer who wants to be safe when exchanging their ownership in a vacation home under Section 1031 should either not use the property for more than 14 days or should make the property available for rent during the year prior to the sale. And always, one should check with their CPA or attorney before deciding to do a 1031 tax deferred exchange.

Rodney is a Regional Vice President of Investment Advantage Group a provider of 1031 tax deferred exchange services and property tax solutions. As a member of the Federation of Exchange Accommodators Rodney and IAG provide traditional and innovative tax strategies for the investment property owners. You can call toll free at 888-212-1031, e-mail him at rodney@iag1031.com or find him on the web at www.iag1031.com.