The IRS recently issued a new ruling for taxpayers who wish to do a 1031 exchange involving a vacation home. Bear in mind that you can only exchange property for the purpose of deferring tax liability if the property is held for investment or used in business. You must, therefore, be able to show that your vacation home was used for rental income. The IRS has set up exact parameters for determining if your vacation home was, in fact, used in a manner entitling it to be used for an exchange. The standards apply both to the vacation home being sold (the old property) which proceeds will be used to purchase another property investment and, if using the proceeds of a sale from other investment or business property for a vacation home, the newly purchased vacation home (the new property).
First, you must own the vacation home for 24 months. Then, for each 12 month period, you must rent the property at fair market value for at least 14 days. During the same period, you may use the home for 14 days or 10% of the time of the days rented, whichever is greater. There will also be a reasonable number of days allowed for maintenance. The key to successfully using your vacation home in a 1031 exchange will be good recording keeping. As in any investment, the advise of an accountant is of primary importance.
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