Vacation Homes & Like-Kind Exchanges

Real Estate|Tax

By Michael Hermes

Now that the real estate market is picking up, it may be a good time to sell or upgrade your vacation home.  Instead of selling your vacation home to buy a new one, you might want to consider a “like-kind exchange” under the provisions of Internal Revenue Code § 1031.  The point of a like-kind exchange is to defer taxable gain on disposition; however, there are many issues that must be navigated.

Generally, the IRS has held that gain or loss from an exchange of a personal residence may not be deferred under IRC § 1031.  This is due to the fact that a personal residence is not income-producing property used in a trade or business or held for investment.

For vacation homes that typically have some personal use and some rental use, the IRS provides specific guidelines for like-kind exchanges in Revenue Procedure 2008-16.  A like-kind exchange of a vacation property will not be challenged if the home meets all of the following criteria:

  • The taxpayer has owned the property for at least 24 months immediately before the exchange.

  • In each of the two 12-month periods immediately preceding the exchange, the home was rented to another person for 14 days or more at fair rental value, and

  • In each of those years, the taxpayer’s personal use of the home did not exceed the greater of 14 days or 10% of the number of days that the home was rented at fair rental value.

For the replacement property, the taxpayer must also satisfy the above rental and personal-use criteria for the 24 months following the like-kind exchange.

If you're thinking of upgrading your vacation home, please contact Schneider Downs to see if you qualify for a like-kind exchange. For similar articles visit the Our Thoughts On blog.

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