Source: http://oicattorney.blogspot.com/2008/03/section-1031-exchanges-irs-has-provided.html
Timestamp: 2017-12-18 22:21:57
Document Index: 117943923

Matched Legal Cases: ['§1031', '§1', '§1031', '§1031', '§1031', '§1031', '§1031', '§1031', '§1031', '§1031', '§280', '§280', '§280', '§1031', '§1031', '§1031', '§1031']

< strong>The IRS has provided a safe harbor under which it will not challenge whether a dwelling unit qualifies as "property held for productive use in a trade or business or for investment" for like-kind exchange treatment under Code Sec. 1031, even though the taxpayer occasionally uses the dwelling unit for personal purposes. The taxpayer must satisfy qualifying use standards affecting ownership, fair rental and personal use of the dwelling unit to be relinquished during the 24-month period before the exchange. The taxpayer must also meet similar standards for the replacement dwelling unit during the 24-month period after the exchange. A taxpayer who uses the safe harbor must also satisfy all other 1031 exchange requirements. Back references:
Rev. Proc. 2008-16 , I.R.B. 2008-10, February 15, 2008.
[ Code Sec. 1031]
Nonrecognition of gain or loss from like-kind exchanges: Business or investment property: Real estate: Exchange of dwelling units: Safe harbor. --
This revenue procedure provides a safe harbor under which the Internal Revenue Service (the "Service") will not challenge whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment for purposes of §1031 of the Internal Revenue Code.
.01 Section 1031(a) provides that no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment (relinquished property) if the property is exchanged solely for property of like kind that is to be held either for productive use in a trade or business or for investment (replacement property). Under §1.1031(a)-(1)(a)(1) of the Income Tax Regulations, property held for productive use in a trade or business may be exchanged for property held for investment, and property held for investment may be exchanged for property held for productive use in a trade or business.
.02 Rev. Rul. 59-229, 1959-2 C.B. 180, concludes that gain or loss from an exchange of personal residences may not be deferred under §1031 because the residences are not property held for productive use in a trade or business or for investment.
.03 Section 2.05 of Rev. Proc. 2005-14, 2005-1 C.B. 528, states that §1031 does not apply to property that is used solely as a personal residence.
.04 In Moore v. Commissioner [ CCH Dec. 56,950(M)], T.C. Memo. 2007-134, the taxpayers exchanged one lakeside vacation home for another. Neither home was ever rented. Both were used by the taxpayers only for personal purposes. The taxpayers claimed that the exchange of the homes was a like-kind exchange under §1031 because the properties were expected to appreciate in value and thus were held for investment. The Tax Court held, however, that the properties were held for personal use and that the "mere hope or expectation that property may be sold at a gain cannot establish an investment intent if the taxpayer uses the property as a residence."
.05 In Starker v. United States [ 79-2 USTC ¶9541], 602 F.2d 1341, 1350 (9 th Cir. 1979), the Ninth Circuit held that a personal residence of a taxpayer was not eligible for exchange under §1031, explaining that "[it] has long been the rule that use of property solely as a personal residence is antithetical to its being held for investment."
.06 The Service recognizes that many taxpayers hold dwelling units primarily for the production of current rental income, but also use the properties occasionally for personal purposes. In the interest of sound tax administration, this revenue procedure provides taxpayers with a safe harbor under which a dwelling unit will qualify as property held for productive use in a trade or business or for investment under §1031 even though a taxpayer occasionally uses the dwelling unit for personal purposes.
.01 In general. The Service will not challenge whether a dwelling unit as defined in section 3.02 of this revenue procedure qualifies under §1031 as property held for productive use in a trade or business or for investment if the qualifying use standards in section 4.02 of this revenue procedure are met for the dwelling unit.
(1) Relinquished property. A dwelling unit that a taxpayer intends to be relinquished property in a §1031 exchange qualifies as property held for productive use in a trade or business or for investment if:
(a) The dwelling unit is owned by the taxpayer for at least 24 months immediately before the exchange (the "qualifying use period"); and
(ii) The period of the taxpayer's personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental.
(2) Replacement property. A dwelling unit that a taxpayer intends to be replacement property in a §1031 exchange qualifies as property held for productive use in a trade or business or for investment if:
(a) The dwelling unit is owned by the taxpayer for at least 24 months immediately after the exchange (the "qualifying use period"); and
.03 Personal use. For purposes of this revenue procedure, personal use of a dwelling unit occurs on any day on which a taxpayer is deemed to have used the dwelling unit for personal purposes under §280A(d)(2) (taking into account §280A(d)(3) but not §280A(d)(4)).
.05 Special rule for replacement property. If a taxpayer files a federal income tax return and reports a transaction as an exchange under §1031, based on the expectation that a dwelling unit will meet the qualifying use standards in section 4.02(2) of this revenue procedure for replacement property, and subsequently determines that the dwelling unit does not meet the qualifying use standards, the taxpayer, if necessary, should file an amended return and not report the transaction as an exchange under §1031.
.06 Limited application of safe harbor. The safe harbor provided in this revenue procedure applies only to the determination of whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment under §1031. A taxpayer utilizing the safe harbor in this revenue procedure also must satisfy all other requirements for a like-kind exchange under §1031 and the regulations thereunder.
The principal author of this revenue procedure is J. Peter Baumgarten of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue procedure contact Mr. Baumgarten at (202) 622-4920 (not a toll-free call).
Posted by www.irstaxattorney.com at 3:28 AM
Labels: section 1031 personal use safe harbor