Source: https://www.efirstbank1031.com/advancedTopics/residenceTopics_vacationHomes.htm
Timestamp: 2019-04-22 07:09:18+00:00

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Can a vacation home qualify for a 1031 Tax-Deferred Exchange? Most tax and exchange professionals think so to the extent that the vacation home is used partly for rental purposes. For instance, if the vacation home is used 50% for personal use and 50% for rental or investment purposes, then 50% of the property is qualifying property held for investment purposes under IRC § 1031. The personal use portion of the vacation home will not be eligible for 1031 Exchange treatment. If the vacation home is used 100% for personal use, forget it - it does not qualify under IRC §1031.
What if the vacation home is used partly for personal use and partly for investment purposes but is never rented out? In this case, the answer is "it depends." It depends on the amount of personal use of the property by the taxpayer. Property held for personal use does not qualify as investment property (IRC § 1031(a)). However, mere incidental personal use of property that is otherwise considered investment property does not disqualify the property from 1031 Exchange treatment (PLR 8103117). "Incidental personal use" is not defined by the Code, Regs. or by other guidance issued by the IRS. Personal use of a vacation home for anything other than "incidental personal use" will disqualify a property if it is never rented out by a taxpayer.
10% of the number of days during the year for which the dwelling is rented (at fair market value rents).
Personal use includes use by members of the taxpayer's family. Personal use does not include work-days a taxpayer is at the residence. The purpose of IRC §280A is to limit deductions with respect to the rental use of a residence. Does 280A also define a property for purposes of a 1031 Exchange? Most tax and exchange professionals do not think so. However, compliance with the minimal personal use provisions under IRC §280A could be considered to be a "good bet" for qualification of the property as a 100% eligible property for 1031 Exchange treatment. Also, see (below) the new "safe-harbor" Rev. Proc. Issued by the IRS in March 2008 which uses language similar to IRC §280A.
If none of these rules will work for a taxpayer because of disqualifying personal use of the vacation home, then the taxpayer should consider converting the property to a qualifying investment property by discontinuing all personal use for a year or more to position the property for a 1031 Exchange. At the same time, be sure to report all expenses related to the property as "investment-related expenses." Renting the property will be a definite help for this purpose but is not mandatory.
New Safe Harbor - The IRS issued Rev. Proc. 2008-16 in March, 2008 for taxpayers who want assurance that their vacation home is a qualifying investment. The Rev Proc applies to any residence owned by the taxpayer in addition to a primary residence so it is broader in its application than to mere "vacation homes." It is effective for exchanges of homes occurring after March 9, 2008.
The period of personal use does not exceed the greater of 14 days or 10% of the days the residence is rented at a fair rental.
By any individual (other than an employee whose use is excludable from income under §119 for the convenience of the employer) unless, for that day, the dwelling unit is rented for a fair rental.
Failure to meet the new safe-harbor requirements does not mean that the exchange automatically does not qualify for §1031 treatment. But it does mean that the IRS could challenge the taxpayer's exchange.

References: § 1031
 §1031
 § 1031
 §280
 §280
 §280
 §119
 §1031