1031 Exchange SAFE HARBOR RULE FOR VACATION HOMEs

UNDERSTAND THE 1031 exchange safe harbor GUIDELINES

1031 exchange SAFE HARBOR RULE FOR VACATION PROPERTies

Revenue Procedure 2008-16, effective march 10, 2008

The 1031 Exchange Safe Harbor Rule provides a number of guidelines that permit you to complete a 1031 exchange of your vacation property or second home.  It is important to note that Rev. Proc. 2008-16 only provides safe harbors for a 1031 exchange. A vacation home or second home can still qualify for a 1031 exchange even if it falls outside of the safe harbor guidelines.

Safe Harbor Rule Requirements

REQUIREMENT #1

You hold the relinquished and replacement property for at least two years. The two years is before the exchange for the old property and 2 years after the exchange for the new property.

REQUIREMENT #2

The property is rented out for at least 14 days each year at fair market value.

REQUIREMENT #3

Use the property for personal use for no more than 14 days or 10% of the total amount of days rented per year. (I.e., If the property is rented out for 200 days in one year, then the taxpayer may use it personally for no more than 20 days in that same year)

Note the words “personal use” in the third requirement of a safe harbor exchange. One question many people ask us is if this includes days you’ve spent at the property preparing it for renters. (i.e., buying furniture and supplies, making improvements, making repairs, etc.) Many property owners know preparing for tenants can easily take more than 14 days per year. The answer is no—any days used to make improvements or prepare the property for tenants do not count towards your 14 days or 10% of total days rented that year. It’s easy to prove that you spent those days making improvements and not relaxing by the beach.

Make sure you maintain records to show that your time spent that day to prepare your property for tenants. Relevant records include receipts, invoices, and meeting logs during property improvement & preparation days.

Following these guidelines ensures the IRS qualifies your properties as held for investment in a 1031 exchange. What if you have rented out your investment property, but don't meet these specific guidelines? Is a 1031 exchange still possible? The answer is most likely yes. The IRS provides the Safe Harbor rule to keep you "safe," but doesn't require them for a 1031 exchange.