Vacation Home or Investment Property?
When buyers purchase a property in Aspen, most hope to 1) enjoy the area, 2) receive rental income and/or 3) sell it for a profit at a later date. If buyers anticipate performing a 1031 tax-deferred exchange when selling the property at a future date, the usage of the property should be considered.
The IRS made a judgement in 2007 for the case Moore v. Commissioner ( T.C. Memo 2007-134) stating that vacation homes used solely by homeowners were not an investment. In this case, the homeowners argued their vacation home was an investment because the home was purchased with the expectation that it would appreciate in the future. The IRS stated their verdict was based upon the use of the home, not the expectation of appreciation by the owners.
In 2008, the IRS created a safe harbor for vacation homes to be considered investment properties, even if the owners use the home for personal use. Homeowners MUST be careful how they use their vacation homes in order for the property to be considered an investment. Below are the IRS guidelines that define if the property can be classified as an investment when exchanged.
Relinquished Property. A dwelling unit qualifies as relinquished property in an exchange if:
a) It is owned by the taxpayer for at least 24 months immediately before the exchange, and,
b) Within the qualifying use period, in each of the two 12-month periods immediately preceding the start of the exchange: (i.) The taxpayer rents the unit at a fair rental for 14 days or more, and (ii.) The taxpayer’s personal use of the dwelling does not exceed the greater of 14 days or 10% of the number of days during the 12-month period that the dwelling is rented.
Replacement Property. A dwelling unit qualifies as replacement property in an exchange if:
a) It is owned by the taxpayer for at least 24 months immediately after the exchange, and,
b) Within the qualifying use period, in each of the two 12-month periods immediately after the exchange: (i) The taxpayer rents the unit at a fair rental for 14 days or more, and (ii) The taxpayer’s personal use of the property does not exceed the greater of 14 days or 10% of the number of days during the 12-month period that the unit is rented.
These are JUST guidelines of the IRS –please consult your tax or legal advisor for EACH exchange transaction. This information was provided by FNF1031 Exchange Services.
