Stephen L. Robison, J.D., LL.M
Taxation and Business
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UPCOMING SEMINARS
NBI SEMINARS
March 19, 2008
Cleveland, OH
Advanced Section 1031 Exchanges
Event# 42631
All NBI seminars
will be held
8:30 A.M. - 4:40 P.M.
For more information
visit the NBI web site at www.nbi-sems.com
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Your Trusted
Section 1031 Advisor Newsletter
New Guidance on SECTION 1031 EXCHANGES OF VACATION HOMES & SECOND HOMES
Inside this newsletter issue:
- New Revenue Procedure related to structuring a Section 1031 Exchange for a vacation home or a second home
- Review of the case of: Moore vs. Commissioner, which is related to sale of vacation homes
- Review of IRS Guidelines related to exchange of real estate properties
- Meeting the Qualifying Use Standards: How would you advise your Client in this situation?
- Criteria to determine if the taxpayer is deemed to have used a dwelling unit for personal purposes
A new Revenue Procedure will be issued by the IRS this month related to structuring a Section 1031 Exchange for a vacation home or a second home. The IRS has issued Revenue Procedure 2008-16, which will be published on March 10, 2008. This revenue procedure establishes certain criteria for 1031 exchanges that occur on or after March 10, 2008. Based on these new guidelines, the IRS will not challenge whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment under Section 1031. This provides relatively generous criteria for structuring an exchange of a vacation home or a second home.
Currently, there is only one case related to the exchange of vacation homes. Illustrative guidance on the exchange of vacation homes was provided in the case of Moore vs. Commissioner, T.C. Memo (2007-134). In this case, the taxpayers exchanged one lakeside vacation home for another. Neither vacation home was ever rented, and both homes were used by the taxpayers only for personal purposes. The taxpayers claimed that the exchange of the homes was a like-kind exchange under Section 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.”
Below are IRS Guidelines related to exchange of real estate properties. If you have any questions regarding these IRS Guidelines or regarding how to structure an exchange within or outside of these guidelines, please contact our office.
- The property to be sold can be exchanged if it is owned by the taxpayer for at least 24 months prior to the exchange, and if in each of the two 12-month periods immediately preceding the start of the exchange:
- The taxpayer rents the property to another person at a fair market rental [determined based on all the facts and circumstances] for 14 days or more, and
- the taxpayer's (or related parties’) personal use of the relinquished property does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the relinquished property is rented at a fair rent.
- The property to be acquired qualifies for an exchange if it is owned by the taxpayer for at least 24 months after the exchange, and if in each of the two 12-month periods immediately after the exchange:
- The taxpayer rents the property to another person at a fair market rental [determined based on all the facts and circumstances] for 14 days or more, and
- The taxpayer's ( or related parties’) personal use of the replacement property 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 market rental.
Meeting the Qualifying Use Standards: How would you advise your Client in this situation? A taxpayer, Client A, reports the sale as an exchange on their federal tax return with the expectation property acquired will meet the qualifying use standards. However, the property acquired does NOT meet the qualifying use standards.
Our Advice: The taxpayer (Client A) should file an amended return for the year of the sale and should not report the transaction as an exchange.
What are the criteria to determine if the taxpayer is deemed to have used a dwelling unit for personal purpose?
If the unit is used by:
- the taxpayer or any other person who has an interest in such unit (including a tenant in common),
- any member of the family of the taxpayer or such other person;
- any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit (whether or not a rental is charged for the use of such other unit); or
- any individual if rented for less than a fair market value rental.
Other considerations for determining if the taxpayer is deemed to have used a dwelling unit for personal purposes include:
- A taxpayer may rent the dwelling unit to a family member if: (1) the family member uses it as a principal residence (and not a vacation home), and (2) the family member pays fair market rent.
- Some taxpayer usage may be allowed for repairs and annual maintenance too. [See Section 280A(d)(2) and (3).
How can you know if your exchange is following all of the IRS rules related to 1031 Exchanges? Talk to the professionals at Strategic Property Exchanges, LLC. We understand the complex rules and updated revenue procedures related to Section 1031 Exchanges. We can help simplify this information for you and your clients. Stephen L. Robison, Esq, is a Qualified Intermediary and is a full time practicing tax attorney, who is Board Certified as a Federal Tax Specialist. Mr. Robison, and our team of professionals, will work with you and your clients. They will creatively and strategically assist you and your client with the exchange of vacation homes or second homes, or other real estate properties, in order to maximize the tax deferral opportunities.
Strategic Property Exchanges: Our Seven Service Guarantees!
- Exchange funds are fully insured
- Unlimited consultation and tax planning
- Protection with Errors and Omission insurance policy
- Covered Tax opinion protects client and advisor
- Complies with: Circular 230; FASB FIN 48; Section 6662; Schedule
M-3; Sabanes Oxley 404
- Advisor protection from IRS sanctions and penalties relating to Circular 230
- IRS "audit-proof" auditing package included
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