1031 Exchange Explained — The Exchange Services Newsletter
Revenue Procedure 2008-16: Dwelling Unit Exchanges
Investors now have guidance for determining whether a “Dwelling Unit” qualifies for 1031 exchange treatment. A dwelling unit is defined as real property improved with a house, apartment, condominium, etc., that provides basic living accommodations including sleeping space, bathroom and cooking facilities. This would probably include most vacation and rental homes.
Revenue Procedure 2008-16 provides safe harbor guidelines for use of a dwelling unit, the adherence to which the IRS will accept as qualifying for exchange treatment under IRC Section 1031. The following guidelines support an owner’s intent that exchange property is held for a qualified use, either productive use in a trade, business, or for investment. However, an exchange may fall outside these parameters and still meet the statutory requirements of section 1031.
A dwelling unit qualifies for exchange treatment in an exchange if,
(a) Owned by the taxpayer at least 24 months immediately before or after the exchange; and
(b) Within that period, in each of the two 12-month periods in that 24 month period,
(i) The taxpayer rents the dwelling unit to unrelated persons at fair rental for 14 days or more, and
(ii) The taxpayer's personal use time does not exceed the greater of: 14 days, or 10% of the days the dwelling unit is rented at fair rental during the 12-month period.
Property use is deemed to be personal if used by:
(a) The taxpayer or any other person who has an interest in such unit (including a tenant in common), or by any member of the family of the taxpayer or such other person; or,
(b) Any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit (whether or not a rental is charged for the use of such other unit); or
(c) By any individual, if rented for less than fair market value rental.
This safe harbor may provide some relief to those worried about past personal usage of a vacation or other rental property. One should note that where there are tenant-in-common owners, or co-owners, use by a family member of a fellow tenant-in-common (over which one may have little control) could count against every tenant-in-common’s allowed personal usage. It also provides that a taxpayer may rent the dwelling unit to a family member if the family member uses it as a principal residence (not as a vacation home) and the family member pays fair market rent. Some taxpayer usage may be allowed for repairs and annual maintenance.
Taxpayers should consult their tax advisors regarding their specific transaction. We welcome your questions, and to serving as your qualified intermediary.
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*Or to another other “non-disqualified party,” having responsibility to deliver Replacement Property to the Taxpayer. This definition of eligible identification “receivers” could include many parties to the sale, including the seller. But the QI usually is best suited to receive the identification, and best prepared to understand what to do with the identification, and is most likely to have it in their files, should the taxpayer need a copy later for their files or an audit.
The information contained herein is for informational purposes only and does not constitute tax, legal, or accounting advice. You are advised to seek appropriate professional advice regarding your specific facts and circumstances. All exchange and qualified intermediary services are offered through Exchange Services, LLC, a Utah limited liability company and affiliate of Zions First National Bank, California Bank & Trust, Vectra Bank Colorado, National Bank of Arizona, and Nevada State Bank.