Safe Harbor Law Makes Vacation Home Purchase Attractive
INDUSTRY NEWS, REAL ESTATE LEGISLATION, TIPS FOR BUYERS, TIPS FOR SELLERS
May 20th, 2010
The IRS has finally set ground rules for those that use a tax deferred 1031 exchange to purchase a vacation rental home that later becomes a primary or second residence. In the past, the IRS would penalize those that did this because it violated the tax deferment rules 1031 exchanges were designed to address. Many Americans found themselves with big tax bills when they exchanged their investment property for a vacation home which they later used as a primary or secondary residence.
Now the IRS has set rules for those that buy a vacation home using a 1031 exchange. The owner must use the home no more than two weeks a year and must rent the home out for at least two weeks a year for at least two years after purchase. After two years, the owner can convert the home to his or her second or primary residence while still avoiding the capital gains tax consequences provided by the exchange law. The owner must charge fair market rent, have a written lease for the rental period and it must be an arm’s length transaction- no renting to a family member.
Visiting the home to perform maintenance does not count toward the owner’s two-week time limit. The benefit here is someone with investment property such as income units, commercial buildings or land that has substantially increased in value can exchange it for a home they eventually want as a primary or secondary residence. Until now, selling one to buy the other would trigger a capital gains tax event or prevent the owner from using the home for personal use.
For specifics on this safe harbor provision in the tax code, contact Russell Marsan of IPX Exchanges at 800-406-1031. He can give you particulars on the tax law and assist as an exchange facilitator. I can assist you with the sale or purchase of the investment or vacation property.
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER ASSOCIATE
REAL LIVING REAL ESTATE PROFESSIONALS
CORNER OF COURT AND PLACER IN REDDING
MORE THAN 25 YEARS LOCAL REAL ESTATE SALES EXPERIENCE
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