1031 Exchange Vacation Home

1031 exchange can be used for second homes, and on February 15 2008, the IRS finally gave some guidance on this with its “rev proc” or Revenue Procedure 2008-16 that clarifies this controversial matter.  I’ve contended all along it was possible, but it was really a guess on my part as to what would be safe and what wouldn’t.  Now, we can see some of the safe harbor guidelines that should put to be this issue finally, and allow this wealth building tool for Lake of the Ozarks property owners.

With Revenue Procedure 2008-16, the IRS will allow a vacation home to qualify for a Section 1031 exchange if the following conditions are met: For the relinquished property

• You have owned it at least 24 months before the exchange
• In each of the two 12-month periods prior to the exchange the property has been rented at fair value for 14 days or more
• The taxpayer’s personal use of the property during the prior two 12-month periods doesn’t exceed the greater of 14 days, or-10% of the number of days during the periods that the property is rented at a fair rental rate.

The part about at least 14 days on rental may trouble some, but think of the power of this for Lake of the Ozarks property owners that have highly appreciated waterfront homes and condos.  The average sales price of a waterfront home has increased 17.2 per year on average the last 5 years.  This opens up several interesting options, all of which end with either deferment of capital gains to a future date, or possible the complete removal of paying any gain on your Lake property!

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