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1031 Exchanges on Vacation Homes Including Condo Hotels

Question

What is the IRS policy on vacation homes and does it apply to condo hotel units?

Joel's Response


The Internal Revenue Service recently issued Revenue Procedure 2008-16, which details exactly how vacation properties can qualify for 1031 exchanges. The explanation aims to clarify whether vacation homes are an investment or personal use property. To qualify for a 1031 exchange, the IRS says that the taxpayers must hold the property for 24 months. The holding period is broken further into 12-month blocks. During each of those blocks the property must be rented at the fair market rate for a minimum of 14 days. In addition, the owner can use the property for 14 days or 10% of the days rented, whichever is greater, plus devote a "reasonable" number of days to maintenance. Because it is a safe harbor ruling, experts say failing to comply with all the rules does not necessarily mean the exchange will be denied or an audit will automatically occur. However, they emphasize the importance of keeping good records of the property's rental history and the dates that the owner occupied the property for maintenance. Condo hotel units can qualify for 1031 exchanges. Of course, you will want to consult with your accountant to determine personal eligibility.




The above question was submitted via e-mail by a visitor to www.condohotelcenter.com. The answer was prepared by Joel Greene, a licensed real estate broker with Condo Hotel Center which specializes in the sale of condo hotel units and fractional ownerships in private residence clubs.


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