Tax Court Rules Vacation Home can be Investment Property...

An issue of some concern in areas, such as Colorado, with large numbers of vacation homes, is the question of whether vacation homes qualify for a 1031 exchange. Property held as a personal asset, such as the home where you live, is not investment property and therefore does not qualify for a 1031 exchange. An investment property, such as a rental, on the other hand does qualify for an exchange. So what is a vacation home -- a personal property not qualifying for an exchange, or investment property that does qualify?

This Tee-Shot has generated a lot of questions about the specific Tax Court case mentioned, (PDF File): Rivera v. Commissioner, T.C. Summary Opinion 2004-81. We should be clear however, that this case DOES NOT say that vacation homes ARE investments, but that they CAN BE investments. Click here for more details...

In a 1981 Private Letter Ruling, the IRS had ruled that vacation homes qualify for a 1031 exchange provided you can prove at least some investment intent. Now, in a recent tax court case involving the personal use of a vacation home, the court has ruled that the vacation home was investment property (in other words, Section 1031 property) based solely on the testimony of the taxpayer's wife that when they bought the property they had an "expectation that it would increase in value", which it had.

In its opinion, the court stated that the activities of the vacation property were of two different types: a rental (or personal use) activity and an investment activity. In other words, you can have investment intent, without a corresponding rental use of the property. While this is great news for those of us in the 1031 industry that worry about an "investment" attack by the IRS on our client's vacation homes, our firm is still recommending to clients that they take the steps they consider necessary to prove their investment intent.

Make sure that you choose a Qualified Intermediary that is knowledgeable and current in these and other areas of Section 1031 of the Code.

--The Experts

	I find Tee-Shots to be a very useful tool in keeping us updated with changes in 1031 exchange rules, such as #49 that covers a bill recently signed by The President. In addition to the general guidance provided by Tee-Shots, The 1031 Exchange Experts staff has always been very willing to provide answers to technical questions. Mahalo nui loa from a real estate company located on Oahu. George Stott The Stott Team Oahu, Hawaii

TEE-Shots are Tips from the Exchange Experts that are designed to make you think about, and ask questions about, the 1031 exchange process.