Does your vacation home qualify for tax deferment?

If you’re like most people, you dream of having a vacation home or a second home. It’s the ultimate way for a regular get away to relax alone, or with family and friends on Lake Michigan, nestled in the woods, or any of the other beautiful settings around our area.

At Tauber Law Offices we’re often asked if the proceeds from the sale of investment properties will qualify and if the perfect vacation home will pass the 1031 test.

We have good news and not so good news.

The bad news first. It will not qualify under IRC Section 1031 if the home is used primarily for personal use.

Now the good news. It is true that your vacation property may qualify as part of a 1031 if you can prove that you have met certain requirements.

Here they are:

For two years after the exchange, you must:

  • Rent the property at fair market value for at least 14 days each year; AND
  • Use the property for personal purposes no more than 14 days each year or 10% of the actual period it is rented out each year (whichever is greater)
  • You may rent it to a family member if they pay fair market rent and it is their primary residence.

Details can be found in Revenue Procedure 2008-16. Keep in mind that investments of vacation properties or second homes that do not follow the safe harbor guidelines provided within Revenue Procedure may still qualify for tax-deferred treatment. It is imperative that investors consult with their tax and legal advisors to determine whether their real property qualifies for 1031 Exchange treatment. Each case is completely different and individual factors, intent and proof to support tax-deferred treatment must all be considered. Finally, if you are considering a future exchange, be proactive and start your planning now.

The way to do that is to contact our family of attorneys at Tauber Law Offices. We have the experience to guide you through all of the sometimes-complex tax rules so that you can truly enjoy your dream of that cabin on the lake.


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