6A — August 9 - 22, 2019 — Multifamily Financing — M id A tlantic
Real Estate Journal
www.marej.com
Multifamily Financing By Brenda Muller, Asset Preservation, Inc. Qualifying vacation property as investment
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for vacation property owners seeking to defer capital gain taxes on the sale of a vacation- type property held for invest- ment. The main issue, in most cases, is whether the property to be exchanged is held “for the productive use in a trade or business or for investment,” or whether held exclusively for the personal use of the taxpayer. The starting point in addressing this issue is Revenue Procedure 2008-16. Rev. Proc. 2008-16 creates a “safe harbor” for exchanges of vacation property; in other words, if the specified owner-
critical at the time a property is sold, since many vacation destinations have appreci- ated and property owners may be facing significant capital gain tax consequences upon disposition. The use of a tax deferred exchange under IRC Section 1031 can be particu- larly important in disposing of vacation property—if such property can qualify as “held for investment”. Tax Treatment at Disposition: Qualifying for a 1031 Exchange Internal Revenue Code Sec- tion 1031 may be available
ow that we are in the full swing of summer, outdoor fun and enjoy-
ship and use requirements of Rev. Proc. 2008-16 are met, the property will qualify for tax deferral under Section 1031. Under Rev. Proc. 2008- 16, a “dwelling unit” is defined as any real property improved with a house, apartment, condominium, or similar im- provement that provides basic living accommodations, which include a sleeping space, bath- room and cooking facilities (e.g., a residential property). The safe harbors for the re- linquished property and for the replacement property are substantially the same. The
IRS will not challenge whether a relinquished dwelling unit, or a replacement dwelling unit, qualifies as Section 1031 property if: 1. The relinquished prop- erty is owned by the property owner for at least 24 months immediately prior to the ex- change, or the replacement property is owned for at least 24 months immediately after the exchange (the 24-month period, whether for the re- linquished property or the replacement property, is re- ferred to as the “qualifying use period”); and 2. Within each of the two 12-month periods which make up the qualifying use period (whether for the relinquished property or the replacement property): • The property owner rents the property to another person or persons at a fair market rent rental for 14 or more days; and • The property owner’s per- sonal use of the dwelling unit does not exceed the greater of: 14 days, or 10% of the number of days the dwelling is rented out. Under Rev. Proc. 2008-16, personal use of a dwelling unit occurs on any day in which the taxpayer is deemed to use the property for personal purposes. Rev. Proc. 2008-16 discusses Barry Moore v. commissioner, T.C. Memo. 2007-134, a 2007 Tax Court decision, which provides a good example of what will not qualify for a 1031 exchange of a vacation prop- erty. In Moore, the property owners exchanged a lakefront vacation property for another lakefront property. The prop- erty owners argued that both of these properties were held for investment because of the potential for long-term ap- preciation, and thus qualified for tax deferral under Section 1031. However, the tax court concluded that neither prop- erty was held primarily for investment purposes, but were instead held for their personal use and enjoyment. In reach- ing this conclusion, the court considered that: • The property owners never rented or attempted to rent the property to others; • The property owners de- ducted mortgage interest as a “home mortgage interest” ex- pense rather than investment interest expense; and continued on page 10A
ing vacations Mid-Atlantic many inves- tors should r e a d t h i s a r t i c l e t o ensure that if they ever want to sell their vaca-
Brenda Muller
tion home, they have the op- tion of potentially receiving favorable tax treatment in a 1031 exchange. Tax conse- quences can be particularly
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