1031 Exchange your Lake of the Ozarks home?

Michael Brady, eastern region vice president of Asset Preservation Inc. in Calverton, N.Y. API (www.apiexchange.com) is a leading qualified intermediary that has successfully completed more than 120,000 Section 1031 tax-deferred exchanges. Check out the API site. Normally, residential property that is not rented and does not otherwise produce income does not qualify as "investment property." But many investors exchange out of true investment properties — a single-family rental, for example — and into a vacation or second home. And Brady says many tax and legal advisers believe it is possible to exchange out of a vacation property which has no rental history as long as the exchanger can demonstrate it was held for investment. They base their opinions on a Private Letter Ruling (PLR 8103117) by the IRS that allowed for tax deferral when the exchanger intended to acquire property for personal enjoyment and as an investment. However, a ruling such as this applies only to the facts and circumstances in a particular situation. "There are no regulations, statutes or court cases which give a definitive answer to the question of exchanging vacation or second homes," says Brady. "Each exchange must be reviewed on a case-by-case basis. But in this particular case, the ‘personal enjoyment’ of a property did not prevent the owner from benefiting from a tax deferred change." Intermediaries such as API are not allowed to provide legal or tax advice, so you should choose carefully. But Brady does point out that IRS regulation 1.1031 (b) states that "unproductive real estate held by one other than a dealer for future use or future realization of the increment value is held for investment and not primarily for sale." Consequently, he says, "it appears that even property owners who have never rented their vacation property but can substantiate that they acquired and held the property because they expected it to increase in value may qualify for a Section 1031 tax deferred exchange." Even with this ruling, you need to consult with your tax and legal adviser.

You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.