New IRS-Issued rev proc on vacation homes....

The IRS just released a ruling setting forth the guidelines for doing a 1031 exchange on a vacation home. The ruling is a Revenue Procedure (2008-16), which is what I call a ‘cookbook ruling,’ which essentially means that if you do certain things, you get a guaranteed result. In this case they will NOT challenge the investment nature or exchangeability of your property.

To avoid any possibility of a challenge to your vacation home exchange, you have to meet certain requirements for your vacation property. During the 24 month period preceding the sale of your vacation home, or the 24 months after the purchase of your vacation home, or both if they both are vacation home properties:

  1. You must have rented the property, at a fair rental price, for at least 14 days during each 12-month block of the 24-month period, and
  2. You did not use the property personally for more than the greater of 14 days, or 10 percent of the days rented, during each 12-month block of the 24-month period.

Since this ruling is a Revenue Procedure, failure to meet the exact requirements of the ruling are not fatal, but could subject you to closer scrutiny of your exchange. In other words, using the property for 15 days does not mean that your exchange is ‘toast’–it merely means that they could audit you if they wish.

The purpose of the ruling is to provide a ‘bright line’ test that gives you concrete assurance that your exchange will not be challenged. This goes into effect for the sale of any vacation homes starting March 10, 2008.
If you are now doing a vacation home exchange with us, or are going to do one, we can help. Call us, or let us call you for further details.

--The Experts

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