By: Mike Kennedy mkennedy@railey.com 301-616-6106 March 14th, 2008 Category: 1031 Tax Deferred Exchanges, Deep Creek Lake Real Estate

This past week the IRS released a ruling that finally addresses some of the questions surrounding vacation and second homes and how they can qualify as a safe harbor in a 1031 tax deferred exchange. A 1031 tax deferred exchange is very common at Deep Creek Lake because of the mixture of homes that make up our market - a majority of vacation homes around the lake are used strictly for personal use on weekends, holidays, and summers - but we also have many homes where the owners will use the property for their own personal enjoyment and also rent it out as a vacation rental.

Previously, their has been a lot of grey area on this subject - the questions most asked were “How much personal use is too much if I want my property to qualify?” and “How long do I have to hold this property before it qualifies?”

With this ruling the IRS now says that if you own a vacation home and have some personal use in it, you should own it for at least two years before an exchange, rent it out at fair market value for at least 14 days in each of the 2 years, and limit personal use to 14 days or 10% of the days rented, whichever is greater. If you follow these guidelines and standards, the IRS states they will not challenge whether or not your property qualifies for a 1031 exchange.

The bottom line is that this is pretty good news for certain people looking to buy or sell a second home at Deep Creek Lake. This ruling can provide much more flexibility to someone down the road looking to change locations. For example, someone who now owns condo in Ocean City - uses it occasionally and has followed the rules above - can now sell that property, pay no taxes on any gain, and then buy something at Deep Creek Lake. However, it must be pointed out that the replacement property would also have to meet the standards above and a few other rules as well to qualify.

Disclaimer - as always this post should not be construed as any type of tax or legal advice. Consult with your CPA or Tax Attorney regarding for further explanation on these types of transactions.

Tags: 1031, 1031 Tax Deferred Exchanges, Deep Creek Lake

This entry was posted on Friday, March 14th, 2008 at 5:22 pm and is filed under 1031 Tax Deferred Exchanges, Deep Creek Lake Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.