6A — August 9 - 22, 2019 — Multifamily Financing — M id A tlantic

Real Estate Journal


Multifamily Financing By Brenda Muller, Asset Preservation, Inc. Qualifying vacation property as investment


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

UNMATCHED SERVICE AND EXECUTION Fannie Mae • FHA • Freddie Mac Multifamily Capital Solutions

Construction Refinance Acquisition Conventional Financing

Affordable Housing Small Balance Loans Flexible Bridge Financing

CUSTOMIZE YOUR CAPITAL SOLUTION TODAY Mortgagecompany@communityp.com 855.363.4646

Made with FlippingBook - professional solution for displaying marketing and sales documents online