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Baltimore
City -
Canton
Fells Point
Federal Hill
Baltimore
City N. -
Roland Park
Guilford
Homeland
Baltimore County -
Ruxton
Cockeysville
Lutherville
Hunt Valley
Greenspring Valley |
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2nd/Vacation Home
Issues
"Do They Qualify for Tax Deferral under
IRC #1031?"
The
Oportunity Exists For Successful Vacation/Second
Home #1031 Exchanges
Property owners throughout the nation are obtaining
the benefit of full reinvestment of equity under
Internal Revenue Code #1031. Many investors exchange
out of a single family rental, duplex, or any
other type of investment property and into a vacation/second
home. Many tax/legal advisors believe it is possible
to perform an exchange on a vacation property
which has no rental history but which still
can be considered "held for investment."
Support For Vacation
Home Exchanges?
Private Letter Ruling (PLR) 8103117, the IRS did
allow for tax deferral when a property owner intended
to acquire property for personal enjoyment and
as an investment. As stated in this PLR, "...the
house and lot you acquire in this trade will be
held for the same purposes as the properties exchanged:
to provide for personal enjoyment and to make
a sound real estate investment." Although
a PLR only applies to the facts and circumstances
in a particular individual�s specific situation,
it appears, in this instance, that "personal
enjoyment" of a property does not prevent
a property owner from benefiting from a tax deferred
exchange.
Property owners throughout the nation are obtaining
the benefit of full reinvestment of equity under
Internal Revenue Code #1031. Many investors exchange
out of a single family rental, duplex, or any
other type of investment property and into
a vacation/second home. Many tax/legal advisors
believe it is possible to perform an exchange
on a vacation property which has no rental history
but which still can be considered "held for
investment."
Each
Individual Case Must Be Reviewed
Note: There are no regulations, statutes, or court
cases which give a definitive answer on the exchange
of vacation/2nd homes. Each exchange must be reviewed
on a case-by-case basis. To qualify for an exchange,
the property owner should be able to support that
the property was "held for investment."
A BRIEF ANALYSIS
IRC Section 1031 provides for the non-recognition
of gain on the exchange of property "held for
productive use in a trade or business or for investment."
Is a vacation property considered "held for
investment?"
Reg. 1.1031(a)-1(b) states in the definition of
"like-kind" that "unproductive real
estate held by one other than a dealer for future
use or future realization of the increment in
value is held for investment and not primarily
for sale." It appears that even property owners
who have never rented their vacation property
but can substantiate that they acquired and held
the property because they expected it to increase
in value (a wise investment decision) may qualify
for a #1031 tax deferred exchange. IRC ?165 and
IRC ?280, which address when losses may be deducted
on vacation homes, may provide additional guidance
to investors.
It is a well known fact that many vacation
areas have appreciated significantly in recent
years and that often property owners purchase
properties with the future appreciation in mind.
A real estate investor should consult with their
own advisors to discuss their specific situation
and see if they may qualify for the benefits of
a tax deferred exchange.
Information
Provided by
Asset Preservation,
Inc.
National Headquarters: 800-282-1031 or
info@apiexchange.com
This information is not intended
to replace qualified legal and/or tax advisors.
Every taxpayer should review their specific transaction
with their own legal and/or tax counsel.
© 2000 Asset Preservation, Inc.
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