IRS Issues Safe Harbor Regulations for "Dwelling Units" - Focus on Vacation Homes

February 26, 2008 --

Like-Kind Exchange of Vacation Homes under I.R.C.Section 1031

The Internal Revenue Service ("IRS") has just released safe harbor regulations, effective March 10, 2008, which provide guidance on the exchange of dwelling units such as vacation homes. These safe harbor regulations are summarized below. Transactions completed under these rules will not be challenged by the IRS as to whether a dwelling unit qualifies under §1031 as property held for productive use in a trade or business or for investment. However, taxpayers are not generally required to take advantage of any of the various safe harbor rules offered by the IRS. Therefore exchanges of dwelling units may still be completed outside of this safe harbor; but in that event, it should be brought to the taxpayer's attention that an exchange outside of the safe harbor may have greater risk of being disallowed by the IRS.

In summary, the safe harbor rules require the dwelling unit to be relinquished (sold) in the exchange to have been owned by the taxpayer for at least 24 months before the exchange and that the property acquired in the exchange (replacement property) be owned by the taxpayer for at least 24 months following the exchange. As to each property, the taxpayer must have rented the dwelling unit to other persons at fair market rent for 14 days or more in each of the two 12-month periods immediately preceding the exchange (as to the relinquished property), or each of the two 12-month periods immediately following the exchange (as to the replacement property). In addition, the taxpayer's personal use of either unit may not exceed the greater of 14 days or 10% of the number of days of rental in each period (although some additional use by the taxpayer over and above this restriction may be allowed for repairs and annual maintenance).

The rental requirement is not satisfied by rental to family members unless the unit is used as a "principal" residence (and not as a vacation home) and the family member pays fair market rent.

To learn more about the safe harbor rules, or to obtain a copy of the Revenue Procedure, please call Florida Exchange, the Fund's approved Qualified Intermediary, at 888-333-2889.

For More Information Contact:

FEC SERVICES, LLC
1900 NW Corporate Boulevard, Suite 201E, Boca Raton, Florida 33431
Tel: 561-998-8047; [Toll free: 888-333-2889]
FAX: 561-994-8992
Internet: rpomerance@att.net

Persons interested in like-kind exchanges should always seek tax advice.

The information contained in these web pages is not intended to be, and should not be considered or relied upon as, legal, tax or accounting advice. These web pages are only intended to be a general treatment of the subject matter and the reader agrees, by accessing these pages, that neither Florida Exchange nor any other person or entity shall have any liability arising from the information presented. Each reader who does not agree with the foregoing release of liability is directed to exit these web pages immediately.

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                                             Last modified: 08/19/2008