HOW TO PROVE YOUR VACATION HOME IS AN INVESTMENT--7 COMMON SENSE SUGGESTIONS

This is a follow-up to our previous blog on the changes in the law on vacation homes, so if you haven't read that blog--it might be a good idea to go back and look at that blog and then come on back to read this blog. 

The newest tax case, Moore v. Commissioner, that came out in May of this year,  holds that vacation homes must be primarily  held for investment and not personal use to qualify under Section 1031.   

So how does a taxpayer prove that their vacation home was held primarily as an investment?  Here are 7 common sense suggestions to follow:   

(1)  Rent out or put the property in a rental pool;
(2) If possible,  don't use the property personally in the year of the exchange or the year before the exchange and certainly don't immediately place the property for sale as that makes you look like a "dealer";
(3)  Don't make personal improvements to the property;
(4)  Purchase the humble cabin--not the most expensive property in the development;
(5)  Please remember to deduct interest as an investment not as home mortgage interest and remember to deduct expenses as maintenance;
(6) Always charge Fair Market Value (FMV) rent to relatives and friends that use the property and pay taxes on that rent; and finally
(7) If you are going to use the property, stay there less than 14 days in any calendar year.

Comments

[Bert Livingston]

In the last 2 years I have held my property for rent continuously at $2,700 per month rent, $3,500 per month etc. but have had no offers...only lookers. I now have a person renting for $1,000 plus utilities per month. So, what is "market rate" in a beachfront high quality condo? Is it better to hold it out for rent and get "0" for rent and the IRS gets "0" in taxes? Or, get rent and report it as i am doing?

I have no mortgage and intend to hold for 10 years as i did hold for 22 years with my previous rental condo. That older condo was a "weekly" rental and the new condo can be rented only "60 days at a time" minimum.

Still, I do not live there or use it more than 14 days a year etc. as it is 35 miles away and I work.

BERT

Steve Wayner responds: If you can prove to IRS that you were charging market rent and that was the only rent you could receive, then you should be able to prove that this was an "investment property".