Tax Free Sales of Vacation Homes

One of the many gray areas with Section 1031(aka Starker) tax deferred exchanges is whether vacation homes qualify. I have long believed that if you consider the property to be held for investment purposes, it does qualify. Even that well-known socialist Congressman from St. Louis, Dickless Gephardt (whose favorite phrase is that anyone receiving any money has “won life’s lottery“), used this approach a number of years ago when he used Section 1031 to legally avoid taxes on the sale of a vacation home.

Here’s a more detailed analysis of the application of Section 1031 to vacation homes that is very interesting.

KMK

Reverse Exchanges Finally Have IRS Guidelines

Delayed like kind (aka Starker & 1031) exchanges were legalized in 1984. You can see all the rules at Tax Free Exchange Corporation’s website.

IRS likes to take its sweet time in issuing regulations on how laws are to be applied. This has been the case with reverse exchanges, where the replacement property is acquired before the original one is disposed of. IRS still hasn’t issued official regulations; but they did finally approve of a safe harbor approach to structuring such transactions. Basically, it involves parking the replacement property with a neutral third party prior to disposing of the original property. It is not the only way reverse exchanges can be handled; but it is the safest way to avoid any IRS challenge.

This safe harbor was published by IRS as Revenue Procedure 2000-37 in its Internal Revenue Bulletin 2000-40. You can download the entire 29 page IRB from IRS’s website or just the three pages with the Rev. Proc from my site.

I will be expanding on my interpretation of this new procedure in the near future.