Our concern is that many writers are implying that a 1031 exchange can be done only if the conditions in IRS Revenue Procedure 2008-16 are met. This is not correct !! Since it was never clearly stated when second homes could qualify for a 1031 exchange, the IRS under pressure published Revenue Procedure 2008-16, effective March 10, 2008. The procedure clearly says you can do “safe harbor” exchange of dwelling units if both meet the ‘qualifying use periods’ and ‘personal use’ limits. As a “safe harbor” exchange it will not be challenged by the IRS. It was never intended to state when a 1031 exchange can be otherwise accomplished. Also, you do not have to exchange for another vacation home, just another piece of real estate whose use will qualify. Taxpayers claiming use of the ‘safe harbor’ also must satisfy all other Section 1031 requirements and regulations.
Can you still do a 1031 exchange following the 1031 law and regulations? Absolutely!!
These rules state that to qualify both the relinquished and replacement properties must be held for productive use in trade or business (like a rental) or for investment. While a specific holding period is not stated it is recommended that both properties be held at least one year. If a tax payer wishing to do an exchange has personally used a second home annually in excess of 14 days or 10% of the days actually rented they need to be aware that the IRS may review the facts to determine if the taxpayer had a qualifying use and profit motive. An explanation of the 2008-16 provisions are available at: Vacation Home Revenue Procedure 2008-16