December, 2007: Tax Court Rules: Vacation Homes do not qualify under Section 1031

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Tax Court: Vacation Homes do not qualify under Section 1031

The Tax Court recently held in Moore v. Commissioner that vacation homes primarily held for personal use do not qualify for exchange treatment.

Taxpayers purchased Lake Property A in 1988, in part due to appreciation potential of the property. Taxpayers' family used the property for recreational purposes two or three weekends per month from mid-April to Labor Day each year, and would visit the property intermittently during the "off season" to perform maintenance and other such caretaking duties. In 2000, Taxpayers disposed of Lake Property A and acquired Lake Property B. Taxpayers' family utilized Lake Property B in the same manner as Lake Property A, with even greater frequency throughout the year. Taxpayers sought tax deferral under Section 1031, claiming both lake properties qualified as property held primarily for investment.

Under audit, the IRS argued that the Taxpayers' primarypurpose in holding the properties should control, while Taxpayers argued that §1031 is satisfied if investment is one of several purposes in holding the properties. The court agreed with the IRS that the Taxpayers' primary intent for both properties was for personal use, not investment. Specifically, the ruling pointed out the following:

1. Taxpayers' primary use of the property was personal enjoyment and recreation;

2. Taxpayers' mere hope or expectation of appreciation cannot by itself establish an investment intent;

3. Taxpayers neither rented, nor attempted to rent, the properties at any point;

4. Taxpayers failed to claim any tax deductions for maintenance expenses or depreciation connected with the properties;

5. Taxpayers treated all of their interest deductions for 1996-1999, and most of those deductions for 2000-2002 as home mortgage interest rather than investment interest;

6. Taxpayers' lack of upkeep is inconsistent with an intent to protect and maximize an investment, and such upkeep was tied to Taxpayers' personal use of the property.

Moore v. Commissioner clarifies that vacation homes and second homes primarily held for personal use do not qualify for exchange treatment.

Home 1031 Exchange 1031 Podcasts Online Handbook Is Your Money Safe? Selecting Your Accommodator The Timeline Our Fee Schedule Newsletters August 14,2008 March 6, 2008 March, 2008 December, 2007 July 2007 November 2006 May 2006 April 2006 March 2006 January 2006 November 2005 October 2005 August 2005 June 2005 (2) June 2005 May 2005 April 2005 March 2005 February 2005 January 2005 December 2004 November 2004 October 2004 September 2004 August 2004 July 2004 June 2004 May 2004 April 2004 March 2004 February 2004 January 2004 FEA Code of Ethics and Conduct Office Directions Contact Us Classes & Presentations Links	Tax Court: Vacation Homes do not qualify under Section 1031 The Tax Court recently held in Moore v. Commissioner that vacation homes primarily held for personal use do not qualify for exchange treatment. Taxpayers purchased Lake Property A in 1988, in part due to appreciation potential of the property. Taxpayers' family used the property for recreational purposes two or three weekends per month from mid-April to Labor Day each year, and would visit the property intermittently during the "off season" to perform maintenance and other such caretaking duties. In 2000, Taxpayers disposed of Lake Property A and acquired Lake Property B. Taxpayers' family utilized Lake Property B in the same manner as Lake Property A, with even greater frequency throughout the year. Taxpayers sought tax deferral under Section 1031, claiming both lake properties qualified as property held primarily for investment. Under audit, the IRS argued that the Taxpayers' primarypurpose in holding the properties should control, while Taxpayers argued that §1031 is satisfied if investment is one of several purposes in holding the properties. The court agreed with the IRS that the Taxpayers' primary intent for both properties was for personal use, not investment. Specifically, the ruling pointed out the following: 1. Taxpayers' primary use of the property was personal enjoyment and recreation; 2. Taxpayers' mere hope or expectation of appreciation cannot by itself establish an investment intent; 3. Taxpayers neither rented, nor attempted to rent, the properties at any point; 4. Taxpayers failed to claim any tax deductions for maintenance expenses or depreciation connected with the properties; 5. Taxpayers treated all of their interest deductions for 1996-1999, and most of those deductions for 2000-2002 as home mortgage interest rather than investment interest; 6. Taxpayers' lack of upkeep is inconsistent with an intent to protect and maximize an investment, and such upkeep was tied to Taxpayers' personal use of the property. Moore v. Commissioner clarifies that vacation homes and second homes primarily held for personal use do not qualify for exchange treatment.

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