A.   Yes.  When a taxpayer sells relinquished property between the dates of October 15^th and December 31^st, he or she may have less than 180 days to complete the transaction.  The Regulations state that you have 180 days OR the date that your tax return is due, whichever comes first, to complete the transaction.  However, even if you start an exchange during this timeframe, you can still get the full 180 days by filing an extension, finishing your exchange and filing your return after the transaction is complete.  The reason this rule exists is because you cannot complete the 8824 reporting form for the exchange that should be part of your return without having the information on both the property sold and the property that was acquired.

The IRS has just issued Revenue Procedure 2008-16 which establish guidelines for 1031 safe harbor treatment of rental/vacation property.  There had been no direct guidance on personal use vacation homes until last year when Moore vs. Commissioner was settled in favor of the IRS.  The case clearly stated properties that were held solely for personal use (not rented) did not qualify and the "mere hope or expectation that the property may be sold at a gain cannot establish an investment intent if the taxpayer uses the property as a residence," i.e., personal use.

 

In September 2007, the Treasury Inspector General for Tax Administration (TIGTA) issued an internal audit report recommending that the IRS give more oversight on like-kind exchanges.  The audit found that promoters were advertising that personal use vacation homes were qualified property for 1031 exchanges and the report stated that was incorrect.  TIGTA recommended the Internal Revenue Service issue additional guidance and do a study to see if there had been any abuses in reporting.  Revenue Procedure 2008-16 is a by-product of this recommendation for guidance on properties that might be used both personally and also rented.

 

This revenue procedure defines the circumstances under which the taxpayer will be given safe harbor treatment when the dwelling unit is held for investment under Section 1031 even though a taxpayer occasionally uses it personally.

 

• Taxpayer must own the property for at least 24 months prior to the sale.
• The taxpayer must rent the dwelling unit for 14 days per year or more at fair market rate.
• Personal use of the property may not exceed 14 days per year or 10% of the total number of days rented per year, whichever is greater.
• The 24 months must be broken into two equal twelve month periods and in each of these twelve month periods must stand on its own when applying the rental or personal use stipulations as stated above.
• The same requirements apply to the property qualifying for the relinquished sale and the replacement acquisition. 
• If a return is filed with the expectation that the replacement property will meet the qualifying use standards but subsequently does not, an amended return should be filed.

 

Our firm (and the majority in the QI industry) had already been using the Section 280 rules when analyzing the qualification of resort property (personal use for only 14 days or 10% of the total number of days rented, whichever is greater) but it was never clear whether or not the property actually had to be rented or how long the taxpayer must treat the property in this fashion before a change of use, i.e., converting it from investment property to sole, personal use property (the seasoning period).  To get the protection of this safe harbor, we now know the property must be rented for at least 14 days every year and that the property must be treated this way for a minimum of two years to be qualified as relinquished property or replacement property.

 

Additionally, the IRS tells us how to handle a situation where a taxpayer intends to use replacement property as rental property but in reality is not successful in doing so . . . an amended return must be filed.

 

Revenue Procedure 2008-16 is effective for exchanges of dwelling units occurring on or after March 10, 2008.  No inference is intended with respect to tax treatment for exchanges of dwelling units occurring prior to the effective date of the revenue procedure.

 

Real Estate Exchange Services is committed to bringing you timely and accurate information on all things 1031. 

REES is pleased to announce that Brian Annino, JD, has joined the firm as a 1031 complex exchange specialist.  Brian joins REES from Weinstock & Scavo, PC where he served the Southeast area as an Associate. As a practicing attorney some of his past responsibilities included representing land and resort development companies, various mortgage lenders and numerous real estate industry businesses. Prior to practicing law, Brian served on the staff of U.S. Senator Joseph Lieberman, where he assisted constituents with obtaining information pertaining to federal funding and grant opportunities.

 

In the role of exchange counselor at REES, Brian will focus on complex 1031 tax-deferred exchanges which include reverse and construction exchanges.  Ron Raitz, president of Real Estate Exchange Services, stated "Brian is a tremendous addition to REES. With him on the team, we are well positioned to remain an industry leader."