See. 1031 exchanges of vacation homes.

• Author: Stone, Howard A.

When does a vacation home qualify as investment property for purposes of a Sec. 1031 like-kind exchange? Based on the definition of "Use as Residence" in Sec. 280A(d), a vacation home used by the owner less than the greater of 14 days or 10% of the days rented at fair rental value during a year may qualify as investment property for Sec. 1031 purposes. It is much less clear whether a vacation home used by the owner for more than 14 days or 10% of the days rented would qualify under Sec. 1031. However, Rivera, TC Summ. Op. 2004-81, provides support for treating vacation homes as investment property when personal use exceeds the Sec. 280A limits.

Facts and Holding

In Rivera, the taxpayers used their vacation home for eight days and rented it for 23 days in 2000. Taxpayers had held the property for about 10 years and testified they had purchased it expecting that it would increase in value (which is did). The main issue was whether expenses incurred during the 11 months the property was vacant were incurred for the production of income under Sec. 212.

The Tax Court ruled that the property was held primarily for investment purposes; thus, the taxpayers could deduct expenses under Sec. 212. The court noted that the term "profit" includes the appreciation in value of assets and amounts realized in subsequent years, and is not confined to recurring income; see Regs. Secs. 1.183-2(b)(4) and 1.212-1(b). For purposes of allocating the appropriate expenses, the court divided the taxpayers' use among personal, rental and investment activity.

Applying Sec. 1031

Sec. 1031 provides for the like-kind exchange of either "property held for productive use in a trade or business or for investment." The Rivera court's analysis of property held for investment should also apply to Sec. 1031 exchanges. Based on Rivera, there may be circumstances in which vacation homes used more than 14 days or 10% of the days rented qualify as investment property under Sec. 1031.

Because...