Property Types
Vacation Homes Sit in the Grey Zone
Revenue Procedure 2008-16 drew a safe harbour around second homes. Outside it, the answer depends on how you actually used the place.
Illustration generated for this article by 1031 Exchange News Today.
Vacation homes are the murkiest category in Section 1031. They are not primary residences, they are frequently rented for part of the year, and whether one qualifies depends almost entirely on how it was actually used rather than on what it is called.
The safe harbour
Revenue Procedure 2008-16 gives a bright line. Stay inside it and the IRS will not challenge whether the property was held for investment.
| Requirement | Relinquished property | Replacement property |
|---|---|---|
| Qualifying period | 24 months before the exchange | 24 months after the exchange |
| Rented at market rate | 14 days or more in each 12-month period | 14 days or more in each 12-month period |
| Personal use limit | Fewer than 14 days, or 10% of rental days if greater | Fewer than 14 days, or 10% of rental days if greater |
Both conditions apply in each of the two twelve-month periods, not averaged across them.
What counts as personal use
More than people expect. Use by you, your spouse, your children, your parents and your siblings all count as personal use, even if they pay rent, unless the rent is at genuine market rate and the property is their principal residence.
Letting a friend stay for free counts. Days spent on repairs and maintenance generally do not, provided that is substantially the reason you were there and you can show it.
Outside the safe harbour
Failing the safe harbour is not automatic disqualification. It means you lose the certainty and the question becomes one of facts and circumstances, decided on evidence: rental listings, booking records, income reported on Schedule E, a management agreement, and how the property was treated on prior returns.
The leading case in this area, Moore v. Commissioner, denied exchange treatment to lakefront properties that were never rented and were used personally. The absence of any rental activity was decisive.
Practical position
- List the property and rent it at market rate for two full years before exchanging.
- Keep the booking records, the listings and the Schedule E filings.
- Track your own nights in the property, and your family's, in writing.
- Apply the same discipline to the replacement for two years afterwards.
Disclosure
This article is published by Easy1031, a qualified intermediary with a commercial interest in readers starting an exchange. The rules and mechanics described here are the same whichever intermediary you use. Nothing here is tax or legal advice.
