Current Articles | Categories | Search | Syndication

Is Your Vacation Home Also an Investment? 169 Views :: 1 Comments :: :: Real Estate Gary Gorman, Realty Times latest news & advice release: I'm not talking about, "you stay in my house while I stay in yours." A like-kind exchange, also known as a 1031 exchange for the Internal Revenue Code section in which it appears, is a transaction in which a seller swaps a rental or investment property for another rental or investment property of equal or greater value, deferring taxes on the transaction. The advantage to such a transaction is that a real-estate owner may be able to sell a property and avoid paying capital gains tax on the exchange. The question is, "Are vacation homes held for investment, or for personal enjoyment?” Since the Tax Court ruling clarified that vacation homes held strictly for personal enjoyment do not qualify; the trick then is to differentiate your property from purely personal enjoyment and document it as investment property. The IRS will allow you 14 personal enjoyment days, as well as a reasonable number of maintenance days a year. The rest of the time it should be available for rent. Make sure that you are depreciating your property. Depreciation is required for rental property, but not allowed for personal enjoyment property. It's another one of those things that impacts how the IRS views the property. You should also have a separate bank account for your rental property. If you want to exchange your property when you sell it, assume that you'll get audited, so do things correctly from the beginning. The difference between being able to do an exchange and deferring the tax, or having to pay tax on the sale of your vacation home depends upon your willingness to follow the steps laid out above. A tax deferred exchange is not difficult to do, but there are specific steps you must follow to make sure every aspect of the sale and purchase complies with US tax laws. Anyone who is thinking about selling a business use or investment property and considering a 1031 exchange should first consult with your local real estate expert. Internal Revenue Service Like-Kind Exchanges - Real Estate Tax Tips Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized. Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets. Like-Kind Property Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not like-kind properties. Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties. More Tips