IRS Finally Addresses Vacation Homes Via Ruling — OK For 1031 Exchanges

Posted @ 2:19 pm - Filed under 1031 Exchanges, Check This Out, Cool Info, IRS, Real Estate Investing, Retirement

Oh boy — here we go with all kinds of letters, and Treasury Department ‘requests’ (Warning: Very, very boring) and a ‘rulling’ by the IRS. What’s all the hubbub about? Oil refineries? Triple net investment operating expense rules for taxpayers filing as former apartment owners? No, silly — it’s about vacation homes for Heaven’s sake. And really, people, I’m not saying it’s not important ‘cuz nearly half my clients have 2nd homes, often called vacation homes.

So what’s the big deal?

They can now make use of a Section 1031 Tax Deferred Exchange — as long as they follow a few simple (simple?) rules AND hold the property for twice as long as normal ‘investment property’ is held. What’s normal? If we’re talking in terms of long term capital gains treatment you should hold your property a year before selling it. This new ruling requires vacation homes to be held two years to qualify for tax deferral in an exchange. Clear as mud? Yeah, no kiddin’. But still clearer than most written government communications.

Here’s some light Sunday reading for you — the IRS Ruling itself.

I’ve read the dang ruling more times than anyone should have to. To be fair, the syntax is organized more clearly than seen in most government documents. Which is to say you can tell they’re talking about real estate and not flu shots — a definite improvement.

The bottom line is this: Follow the rules found in the document and your vacation home will qualify for tax deferred treatment. It goes into effect March 10, 2008. Wait a minute — that’s tomorrow. Cool!

I pondered whether I should publish all the different rules, but you’ll get the drift after reading the linked pdf. Here’s what I got out of it as central.

The IRS isn’t gonna challenge whether or not it’s an investment property

Personal use vs number of days rented out is now clearly defined — pay attention

Holding period to qualify is flatly stated as 24 months

As usual your intent will matter — so avoid calling an apple a baseball

This ruling is known more as a Revenue Procedure — not the best of all worlds, but a sort of recipe for success when dealing with the specific issue addressed. Again, plain as mud? Deal with it, ‘cuz this is the best we’re gonna get for awhile. Treat it the same way you would a recipe for your favorite cake, and you’ll be fine. The last time the IRS dealt with this was in a ‘letter’ way back in 1981. I’ll show mercy by not tempting you with with a link to that one. You can thank me at your leisure.

Seriously, this new ruling is something real estate investors can rely on with reasonable confidence.

The Practical Side

I’ve had folks acquire ‘vacation homes’ in nearly every corner of the country. Many of them plan to live in the homes full time once they retire. Many of them will use them as a sort of ’seasonal’ home. An example would be those living in harsh winter states owning vacation homes in Arizona or California. San Diego beaches are in large part populated by ‘Snow Bunnies’ during winter — folks escaping their annual snow shoveling festival.

These folks can now have a change of heart and not be dinged by ruinous taxes — or worse, be found out by audit of fudging the facts on their tax return. If they were sure they wanted a home by the beach and later realize they’re desert folk, no problem. Just tax defer to the desert. Life happens, and this ruling makes adjusting to life’s curve balls a little easier on the wallet.

This is definitely a good thing.

This entry was posted on Sunday, March 9th, 2008 at 2:19 pm and is filed under 1031 Exchanges, Check This Out, Cool Info, IRS, Real Estate Investing, Retirement. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.