1031 exchange - rules question

[Heidi M.]

I have a vacation home at Lake Tahoe that I do not utilize often. I would like to sell and purchase another unit in the same area and was hoping I could do a 1031 exchange. Current property I do not rent due to the HOA not allowing STR. Was not that way when we purchased. My question is if I put a long term tenant in there how long would I have to rent the current property in order to do a 1031 exchange?

[Ashish Acharya]

Originally posted by @Heidi M.:

I have a vacation home at Lake Tahoe that I do not utilize often. I would like to sell and purchase another unit in the same area and was hoping I could do a 1031 exchange. Current property I do not rent due to the HOA not allowing STR. Was not that way when we purchased. My question is if I put a long term tenant in there how long would I have to rent the current property in order to do a 1031 exchange?

In Moore v. Commissioner, the taxpayers exchanged one lakeside vacation home for another. Neither home was ever rented. Both were used by the taxpayers only for personal purposes. The taxpayers claimed that the exchange of the homes was a like-kind exchange under 1031 because the properties were expected to appreciate in value and thus were held for investment. The Tax Court held, however, that the properties were held for personal use and that the “mere hope or expectation that property may be sold at a gain cannot establish an investment intent if the taxpayer uses the property as a residence.”

However, Rev. Proc. 2008-16 provides a safe harbor for when a second home will qualify as held either for productive use in a trade or business or for investment purposes. Under Rev. Proc. 2008-16, the IRS will not challenge that a property qualifies for Section 1031 gain deferral if—

1. the relinquished property has been held for at least 24 months immediately preceding the exchange and in each of the two 12-month periods immediately preceding the exchange,

a. the taxpayer rents the residence to another person at fair market value for at least 14 days, and

b. the taxpayer does not use the property more than the greater of 14 days or 10% of the total number of days the property was used; and

2. the replacement property is held for at least 24 months immediately after the exchange and in each of the two 12-month periods immediately following the exchange,

a. the taxpayer rents the residence to another person at fair market value for at least 14 days, and

b. the taxpayer does not use the property more than the greater of 14 days or 10% of the total number of days the property was used