Sale of vacation home disallowed as tax-free like-kind exchange.

• Author: Ackerman, Joel

The Tax Court recently ruled that the sale of a vacation home and the purchase of another through an escrow agent did not qualify for tax-free like-kind exchange treatment under Sec. 1031 because the homes were not held for investment (Moore, TC Memo 2007-134). The taxpayers (P) used the homes exclusively for recreational purposes and never rented or attempted to rent out the homes to others. P's argument that he purchased the property with the expectation that the property's value would increase and he would sell the property at a profit was not enough to qualify it as property held for investment.

P purchased a second home three hours away from his principal residence. From April to September, P's family would use the property exclusively for recreational purposes two or three times a month until Labor Day (when the property would be closed until the following spring). During the off months, P would occasionally visit the property to rake leaves and perform other caretaker functions consistent with using the property as a vacation home.

P eventually moved his principal residence farther away from the vacation home. He began using the property less frequently and it became run down. P decided to purchase another vacation home closer to his new principal residence and treated the purchase and sale of the vacation homes as a tax-free like-kind exchange under Sec. 1031.

To qualify for like-kind exchange treatment under Sec. 1031:

1. Both properties exchanged must be of like kind;

2. Both properties must be held for trade, business, or investment purposes; and

3. The exchange must satisfy the procedures of a like-kind exchange under Sec. 1031(a)(3).

According to the court, the properties sold and purchased did not satisfy the wade/business/investment requirement. Neither the Code nor the regulations defines "held for investment" for purposes of Sec. 1031. The courts have ruled that the primary purpose in holding the properties must be for trade, business...