Can I Exchange a Vacation Home?

We frequently get questions about whether a vacation home can be used in an Internal Revenue Code 1031 Exchange. Vacation homes may qualify for an exchange under Internal Revenue Code 1031 if the taxpayer’s use of the home is minimal and the property is also rented.

On February 15, 2008, the Internal Revenue Service issued Rev. Proc 2008-16, which issued more stringent guidelines for exchanging vacation homes.

The relinquished property must have been owned for 24 months immediately before the exchange.

In each 12 month period before the exchange, the taxpayer must rent the relinquished property for 14 days or more, at a fair market rate.

The taxpayer’s personal use of the property cannot exceed the greater of 14 days or 10% of the days rented in either 12 month period.

Furthermore, the replacement property must be owned for 24 months immediately after the exchange.

In each 12 month period after the exchange, the taxpayer must rent the replacement property for 14 days or more, at a fair market rate.

The taxpayer’s personal use of the replacement property cannot exceed the greater of 14 days or 10% of the days rented in either 12 month period.

In summary, a vacation home must be owned two years before an IRC 1031 Exchange can be used, and two years after the exchange has been completed. Additionally, the property must be rented for at least 14 days in each of the four years. These guidelines represent a more onerous requirement then was previously expected in the exchange of vacation homes.