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Video instructions and help with filling out and completing Form 4797 Exchanged

Instructions and Help about Form 4797 Exchanged

Welcome to 10:31 University I'm Paul Holloway today's topic is is it possible to do a 1031 exchange on a second home or vacation home most 1031 exchanges are done on pure investment properties that being a rental role and held for long term speculative reasons or a commercial building that you're running your business out of but what about a vacation home or a second home that you might have in a resort type area is it possible to make that work under 1031 and at the same time is it possible to actually use that property for personal enjoyment for a certain amount of time well the answer is yes as long as you follow this revenue procedure revenue procedure 2022 - 16 this procedure came out to give you guidance that if you follow these steps you will have what is referred to as a safe harbor exchange and you are not swimming in shark-infested waters it's a three-fold test of what you need to do to make a so-called second home or vacation home work under 1031 of the code the first test is the holding period test and what the IRS wants you to do is to actually own the property that you are either selling or the replacement second vacation home that you're going to buy on the back end they want you to own it for two full years minimum so you have to actually own the property for minimum of two years next is the rental test and what the IRS wants you to do in each of those two years of ownership for the two-year rule is that they want you to have at least a 14-day rental history in each of the two years of ownership so 14 or more days of a rental history in year one and 14 or more days of a rental history in year 2 I get a lot of people asking me well what if I rent it out one month for the first year but then I take the tin and out and I just use it for personal enjoyment the next year that will not work it's got to be minimum 14 days year one minimum 14 days year to now so that satisfies the first two steps the final step is the personal use test this is the one that can tend to be a bit problematic for people that want to use the property for personal enjoyment but the IRS wants you to actually keep your personal use to a minimum while you are holding on to that property for the first two years so in each of years 1 & 2 they would like to have you keep your personal use to 14 days or under in year one 14 days or under in year 2 now technically what it says is or 10% of the rental history whichever is greater so it is possible that you could actually use it for personal use more than 14 days but you would need to have a substantial rental history on that property in that year so for example if you rented it for 250 days in year one you could actually possibly use the property for 25 days which is 10% of the rental history for that year only but then the next year the clock runs again and they want you to try and keep your personal use to under 14 days in that year as well I get the question a lot that will what if I don't personally use it and I'm the taxpayer doing the exchange but my wife my kids other family members they go up and use the property instead my understanding is is that you can actually have any family members tack on to your use so probably not a good idea to try and argue that I wasn't there therefore it doesn't count against my usage any family members that use it tax on to you so once again quick summary hang on to that vacation home or second home for at least two years or if you're relinquishing a property looking back two years you got to show that you held it for at least two as far as rental history goes make sure that you rent it at least 14 days year 1 and year 2 and personal use try and keep it under 14 days year 1 and year 2 and then you will have a safe harbor vacation home second home type 1031 exchange so hopefully you enjoyed this piece this has been 1031 University I am Paul Holloway and if you enjoyed this piece or other pieces please subscribe to our YouTube channel we look forward to doing for future classes for you thank you.

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