The primary issue that needed to be addressed and clarified by the Internal Revenue Service (“IRS”) was whether a vacation property, a second home or a primary residence that had been converted to investment or business use property would be considered “qualified use property” and therefore qualify for 1031 Exchange treatment.

The purchase of a vacation property or a second home will qualify as replacement property in a tax-deferred exchange transaction if the following safe harbor requirements are met:

  • The subject property is owned and held by the investor for at least 24 months immediately following the 1031 Exchange (“qualifying use period”); and
  • The subject property was rented at fair market rental rates to other people for at least 14 days (or more) during each of the following two (2) years; and
  • The investor limits his or her personal use and enjoyment of the property to not more than 14 days during each of the following two (2) years, or ten percent (10%) of the number of days that the subject property was actually rented out to other people during each of the following two (2) years.