Vacation Rental 1031 Exchange

We are sometimes requested whether or not tax legal responsibility from the sale of a trip house could be deferred utilizing the procedures of IRC part 1031. The reply to this query is present in Income Process 2008-16.

The final rule for ALL 1031 exchanges is that the property should be held for primarily for funding of use in commerce or enterprise. To be able to show that your trip house is held primarily for funding, and is subsequently 1031 eligible, slightly than on your personal private use the Inside Income Service (IRS) set out particular parameters so that you can observe. This is called a “secure harbor.” These parameters are:

For the Relinquished or Previous Trip Property you need to have:

Owned the property for a minimum of two years, and;

In every of these two years, the property should have been rented for 14 days or extra at honest market lease.

For the Substitute or New Trip Property

Owned the property for a minimum of two years, and;

In every of these two years, the property should have been rented for 14 days or extra at honest market lease.

Along with these “secure harbor” necessities there are further necessities:

Your individual use of the1031 trade trip houses should be no better than 14 overnights or 10% of the times rented per 12 months, whichever is much less, however excluding time spent on the property for restore and upkeep.

The time period “secure harbor” implies that the IRS won’t problem your 1031 declare of tax deferral when you can show these information. The burden of proof is all the time on the taxpayer. If you happen to 1031 trade trip houses and are unable to show these exact information your 1031 trade should be honored. However will probably be topic to better scrutiny by the IRS. When you don’t meet the “secure harbor” check you possibly can nonetheless show funding intent by different information and circumstances. A number of the greatest methods to show funding intent are:

Preserve an evaluation of the property’s funding potential if you purchase it. Market traits and resale potential are essential components of this evaluation,

Schedule your trip house in your tax return beneath your schedule E,

Take depreciation,

Present revenue from the property,

Preserve monitor of your private use time, and bear in mind time spent on restore and upkeep will not be counted as private use time,

Make enhancements to the property that may maximize its funding potential,

Don’t checklist the property on schedule A of your tax return.

Present why you offered the property in lower than two years is sensible from an funding viewpoint.

Remember that when superior planning is feasible most taxpayers convert their private use trip property to property held primarily for funding beneath the above acknowledged secure harbor guidelines previous to per forming a 1031 trade. A second house could be transformed to an funding property, altering the character by inserting the property right into a rental pool, lowering private use and itemizing the property on Schedule E on tax return.

Trip properties held in a 1031 trade could be transformed to a main house wherein case it may qualify for tax exemption beneath I.R.C. part 121. A second house could be transformed to an funding property, altering the character by inserting the property right into a rental pool, lowering private use and itemizing the property on Schedule E on tax return.

All the different necessities of part 1031 exchanges apply to exchanges of trip houses.

By,
Steven Hickox ESQ