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The IRS recognized that many taxpayers hold dwelling units primarily for the production of current rental income, but also use the properties occasionally for personal purposes. In the interest of sound tax administration, this revenue procedure provides taxpayers with a “safe harbor” under which a dwelling unit will qualify as property held for productive use in a trade or business or for investment under IRS Code Section 1031, even though a taxpayer occasionally uses the dwelling unit for personal purposes (i.e. vacation homes).
Definition:
For purposes of this revenue procedure, a dwelling unit is defined as any real property improved with a house, apartment, condominium, or similar improvement that provides basic living accommodations including a sleeping space, bathroom and cooking facilities (e.g., a residential property).
Effective Date:
This revenue procedure is effective for exchanges of dwelling units occurring on or after March 10, 2008. No inference is intended with respect to the federal income tax treatment of exchanges of dwelling units occurring prior to the effective date of this revenue procedure.
Application:
The IRS will not challenge whether a dwelling unit qualifies as a property held for productive use in a trade or business or for investment if the qualifying use standards of this revenue procedure are met. The “qualifying use standards” are as follows:
(1) Relinquished Property - A dwelling unit that a taxpayer intends to be “sold” in a 1031 exchange qualifies as property held for productive use in a trade or business or for investment if:
(a) The dwelling unit is owned by the taxpayer for at least 24 months immediately prior to the exchange (the “qualifying use period”); and
(b) Within the qualifying use period, in each of the two 12-month periods immediately preceding the exchange, the taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, AND the period of the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental.
(For this purpose, the first 12-month period immediately preceding the exchange ends on the day before the exchange takes place (and begins 12 months prior to that day) and the second 12-month period ends on the day before the first 12-month period begins (and begins 12 months prior to that day.)
(2) Replacement Property – A dwelling unit that a taxpayer intends to be replacement property in a 1031 exchange qualifies as property held for productive use in a trade or business or for investment if:
(a) The dwelling unit is owned by the taxpayer for at least 24 months immediately after the exchange (the “qualifying use period”); and
(b) Within the qualifying use period, in each of the two 12-month periods immediately after the exchange the taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, AND the period of the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental.
(For this purpose, the first 12-month period immediately after the exchange begins on the day after the exchange takes place and the second 12-month period begins on the day after the first 12-month period ends.
Personal Use:
For purposes of this revenue procedure, personal use of a dwelling unit occurs on any day in which the taxpayer is deemed to use the property for personal purposes. Personal use includes (i) use by the taxpayer or any other person who has an interest in the property or by a family member; (ii) use by any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit (whether or not a rental is charged for the use of such other unit) or (iii) use by any other individual if rented for less than fair market value. A taxpayer can rent the property to a family member if the family member uses the property as a primary residence and the family member pays fair market rent. Whether a dwelling unit is rented at a fair rental is determined based on all the facts and circumstances that exist when the rental agreement is entered into. All rights and obligations of the parties to the rental agreement are taken into account.
Limited Application of Safe Harbor:
The safe harbor provided in this revenue procedure applies only to the determination of whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment under IRS Code Section 1031. A taxpayer utilizing the safe harbor in this revenue procedure also must satisfy all other requirements for a like-kind exchange under the IRS 1031 Code and the regulations there under.
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