Vacation Property 1031 Exchange Guidelines

Great News! The I.R.S. will not challenge whether a vacation property qualifies for Section 1031 treatment if certain specified ownership and use requirements are met. The I.R.S. released Revenue Procedure 2008-16 providing definite guidelines for a safe harbor vacation property 1031 exchange.

To meet the safe harbor requirements, a taxpayer, during the 24 months prior to the sale of their vacation home or the 24 months after the purchase of their vacation property as a 1031 replacement property must:

1. Rent the property at fair market rent for a minimum of 14 days during each 12 month period of the 24-month period.

2. Limit personal use of the property during each 12 month period of the 24-month period not to exceed the greater of: 14 days or 10 percent of the number of days the property is rented at a fair market rent during each of the two 12 month periods.

The IRS defined personal use to include:

o The taxpayer or any other person who has an interest in the vacation property including a tenant in common interest.

o Use by any individual who uses the property under an arrangement which enables the taxpayer to use some other property. For example, trading vacation property use whether or not a rental is charged for the use of such other property is considered personal use.

o Use by any member of the family of the taxpayer unless the vacation property is rented out as a primary residence at a fair market rent.

o Use by any other individual if rented for less than fair market rent.