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.