Midland has its South office in sunny southwest Florida. The majority of the exchanges we facilitate are for taxpayers selling Northern investment properties for properties in the Florida sunshine. The objective is primarily to rent the property out and also have the opportunity to enjoy it themselves. Previously, it had been difficult to determine what the IRS expects when it comes to vacation property and how it would be treated within the 1031 exchange context. Thanks to Revenue Procedure 2008-16 and Moore v. Commissioner, we now have clear guidelines for what would qualify and what would not. For your vacation property to be eligible for the 1031 treatment, you must meet the following criteria:
During the 24 months before the sale:
- You must show that you have rented the property at fair market value for at least 14 days each year.
- Personal use does not exceed the greater of 14 days or 10% of the number of days the property was rented each year.
These same criteria apply to the replacement property if acquired as a vacation home.
Here is an example:
John and Mary Smith own a Condo on Fort Myers Beach that they are about to sell, and would like to do a 1031 exchange. Here are the details on the property:
- Owned Condo for seven years
- The condo has been in a Rental Program and rented 200 days each year
- Personal use is 17 days each year
Based on the criteria outlined, they cannot use the property for more than 10% of the number of days the property was rented each year, or 20 days. Since they only used it for 17 days each year, they meet the criteria.
Other steps to take for vacation property:
You can take other steps to support that your vacation property is a viable 1031 exchange property. First, deduct any mortgage interest and property taxes on Schedule E as a business expense, as well as any repair costs, depreciation, and miscellaneous expenses. Next, make sure that it is clear from the beginning that your intention with this property is to treat it as an investment. Finally, keep a log of what days you use it personally, what days you were doing work on the property, etc. These are all easy steps to take to ensure that your exchange is solid should you ever find yourself the subject of an IRS audit. We have a list of Frequently Asked Questions (FAQs) that may also answer some questions you have about 1031 exchanges and the rules involved.
While most of the exchanges we facilitate involve the purchase of residential property as the replacement property, it is important to expand on the definition of like-kind. All real estate is like-kind as long as it is held for investment or business-use. Those individuals who no longer wish to be landlords of residential or commercial property, have the option of selling that property in an exchange and reinvesting into a more passive income-producing vehicle such as:
- Triple Net Lease (Net Lease or NNN) Investment Properties
- Agricultural (Farm) Properties
- Vacant Undeveloped Land
- Oil & Gas Interests
- Mineral Rights
- Water Rights
- Air Rights
- Easements in perpetuity
- Leases with a remaining life, including options, of 30 years or more
- Tenant-In-Common “TIC” Investment Property Interests
- Delaware Statutory Trusts “DSTs” Investment Property Interests
1031 exchanges offer the taxpayer a valuable tool for saving tax dollars, and a myriad of other benefits, such as diversification, market relocation and consolidation. Call us today at 239-333-1031 or click here to schedule a free consultation.