VACATION--SECOND HOMES---NEW INTERPRETATION

Good news!  After years of strict interpretations, the IRS just issued Rev. Proc. 2008-16, which gives a new and broader definition of "dwelling units" and how they can qualify as  “like kind” real property.

In order for property to qualify for a Section 1031 tax-deferred Exchange, the property sold must have been held for productive use in a trade or business or held for investment purposes.  The property purchased as the replacement property must also be “like kind” and thus must also be held for productive use in a trade or business or for investment purposes. 

So where does that leave a vacation/second home?  Can it qualify for a Section 1031 Exchange?  There have been many interpretations answering this question.  More than 18 months ago, we discussed this very topic -- the vacation/second home issue -- in our August 30, 2006 blog.  The interpretation had been rather narrow and strict.

First, the technical information.  If a taxpayer owns a vacation/second home for at least 24 months immediately before the Section 1031 Exchange and rents the dwelling unit to another person(s) at a fair market rental for 14 days or more a year and uses it for personal use less than 14 days a year or 10 percent of the number of days during the 12-month period the dwelling unit is rented at a fair market rent, the property will qualify under Section 1031 for a tax-deferred Exchange. 

Whew--that was a long technical statement.  Please note the same rule applies for the property the taxpayer purchases as a replacement property if that is going to be a "dwelling unit.  I have a three letter word for this new Rev. Proc.---WOW !!! 

Now, let me give you a nontechnical interpretation.  A taxpayer who owns a vacation or second home for at least 24 months, uses it for 14 or less days a year, or less than 10% of the time it was rented in any of those years, can qualify that dwelling unit for a tax-deferred Exchange. 

The taxpayer doesn’t have to rent it out for an extended length of time, it could be rented for just 14 days a year and could qualify under this new Rev Proc.  What if the taxpayer was purchasing a replacement property  that was a "dwelling unit"?  The same rules apply, the taxpayer could then find a replacement property which would also have to be owned for 24 months, rented out for 14 days or more a year, etc.  But, again, there is no obligation to rent it out long term. 

This is a monumental change in the interpretation and is sure to benefit many vacation-second home owners.  It becomes effective March 10, 2008.   As I said, WOW!!!   FYI--You bloggers now have information on Vacation homes or second homes that probably the majority of people in my own industry, as well as CPA's, are not even aware of yet.   I do try to keep my bloggers as up to date as possible.

Comments

[Stephen A. Wayner, Esq. CES]

Rev Proc 2008-16 is very restrictive and will be followed to the letter by IRS.

[Ford Fernandez]

Any updates to this article ?
We have a second home in the Hamptons and we're concerned about Tax Code
REV. Proc. 2008-16

Any comments ?

Fordfern@hotmail.com