provided by:
Courts that have analyzed 1031 exchange eligibility of a property have generally concluded that the requirements are met if the property is held “primarily for investment.” Internal Revenue Code Section 1031(a) provides that:
"[n]o gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment" (emphasis added)
In other words, if there is objective evidence that the taxpayer’s primary motive is to hold the property for investment, then limited use of the property by the taxpayer for personal enjoyment will not destroy the investment character of the property.
Difficulties in determining intent
It is easy to frame the issue, but it is often difficult to determine whether the taxpayer’s investment intent dominates an intent to hold for personal use. This is especially true when the taxpayer holds a vacation property and uses it from time to time. The practical difficulty is compounded by the IRS's limited guidance concerning the requirements to prove that the property is held for investment. A recent Treasury Inspector General Audit report (“TIGA”) pertaining to the IRS’s enforcement of 1031 exchanges was critical of the IRS for its failure to provide guidance to taxpayers, thereby leaving unrebutted the claims of some promoters that vacation properties and second homes were generally eligible for exchange.
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Author: Scott Saunders
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