Safe Harbor for Like-Kind Exchange of Dwelling Units

Revenue Procedure Number 2008-16, released on March 10, 2008, seeks to clarify areas where a safe harbor (meaning the IRS will not challenge) exists for exchanges of dwelling units in 1031 exchanges.

There has always been a strict line within the IRS rules that provides that property used as personal residences may not be used in a 1031 tax deferred exchange. Exceptions to that rule include use of personal residences as rental property on a part-time basis. The new rules establish when residential property qualifies as a property “held for investment” that can be used in a 1031 tax-deferred exchange. Accordingly, the property must be held for investment for 24 months prior to the exchange, the property must be rented for at least 14 days every year and the owner must not reside at the residence for more than 14 days each year. 

An exchanger may use a residential unit as a replacement property provided that the property is owned for at least 24 months after the exchange, is rented for 14 days or more per year and does not use the property for personal use more than 14 days each year. 

This Revenue Procedure clarifies rules already in place regarding exchanges of dwelling units used as property “held for investment” in trade or business for investment purposes. As with any tax matter, tax counsel such as a CPA or tax attorney should be consulted with regards to issues surrounding individual transactions.