VACATION HOMES IN TAX DEFERRED EXCHANGES

Can you use a vacation home in an exchange? A 2008 IRS Guideline shows how using the Safe Harbor Status can make it work.

Two Year Rule

IN THE 24 MONTHS immediately before the sale of the relinquished property and immediately following the purchase of the replacement property the taxpayer must own the property and rent to another person at fair market rent for at least 14 days or 10 percent of the days rented annually.

Personal Use

THIS DEFINITION is fairly broad. Personal use is defined as use by the taxpayer or a person who has an interest in the property (like a tenant-in- common or partner); a family member or friend of the taxpayer, an individual who uses the property under an arrangement that would allow the tax payer use of the some other property (whether any rent is collected on either property or not.) Some taxpayer usage may not be counted as personal use if it is for repairs and annual maintenance, but should be carefully documented. Be prepared to prove it!

It is not considered personal use if family member and or friends of the tax payer were to pay a fair market rent and treat the property as a principal residence (as opposed to a vacation rental.)

Fair Market Rent

This is determined by facts and circumstances existing when the rental agreement is entered into.  All rights and obligations are taken into account.  It is always recommended that a third party weigh in with some kind of estimate or comparison information. 

Safe Harbor

How can you make sure it falls into the Safe Harbor?  Limit your personal use and rent it out.  Document proper usage for at least two (2) years before the sale, or after the purchase.

AT A GLANCE

  • MUST RENT initial property for 24 months just before sale
  • MUST RENT new property for specific amounts of time
  • LIMIT PERSONAL USE to greater of 14 days or 10% of days rented
  • PERSONAL USE IS use of property by anyone with an interest in the property, a family member or friend, or as an exchange for like use of other
  • FAIR MARKET RENT uses current circumstances & facts to establish a rate, and it is recommended to get the input of a third

 

THIS LITERATURE IS PRODUCED TO PROVIDE A GENERAL OVERVIEW OF THE TAX-DEFERRED EXCHANGE PROCESS. YOU SHOULD NOT DEPEND UPON THIS LITERATURE WHEN DETERMINING WHETHER OR NOT YOU MAY WANT TO COMPLETE A TAX-DEFERRED EXCHANGE. YOUR DECISION TO DO SO RESTS ENTIRELY WITH YOU, WITH THE ADVISE OF YOUR OWN ACCOUNTING AND LEGAL PROFESSIONAL, WHETHER THAT BE YOUR ACCOUNTANT, C.P.A. OR ATTORNEY. WE ARE QUALIFIED INTERMEDIARIES AND ARE BY I.R.S. REGULATION PRECLUDED FROM ACTING AS YOUR QUALIFIED INTERMEDIARY IF WE HAVE BEEN YOUR ATTORNEY OR ACCOUNTANT DURING THE TWO (2) YEAR PERIOD BEFORE YOUR EXCHANGE. AS YOU CAN SEE, OUR SERVICES AS FACILITATOR DO NOT REPLACE THE TRULY PROFESSIONAL SERVICES OF YOUR ATTORNEY OR ACCOUNTANT!