Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Second Homes & 1031 Exchanges

Posted by taxguru on July 13, 2006

 

Q:

Subject: Exchange Question
 

Can you do a Like Kind Exchange for second home (non primary residence) if it had never been rented?

 
A:

There are a lot of gray areas in this simple question.

If the property was only used for purely personal reasons, it does not qualify for a 1031 exchange and any gain on its sale will be taxable.

If the case can be made that it was used for either investment or business purposes, it would be eligible for a 1031 exchange.

The fact that the property appreciated in value (or else why would you even consider a 1031?) does document that it was a good investment.  However, if IRS were to challenge it, they would question whether investment was the main motivation for holding onto the property or was it for personal pleasure. Whether it truly qualifies or not could hinge on how often it was used for personal pleasure.  If it sat vacant most of the time, with occasional maintenance visits, a good case could be made for considering it to be Investment Property.  If it was constantly being used by family and friends, that would be a harder argument to defend.

I’m sorry not to have a cut and dried answer; but this is the best that can be done with this topic.

Good luck.  I hope this helped at least a bit.

Kerry Kerstetter

Follow-Up:

Yes thank you very much.
 
 

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