Tax court rules against 1031 exchange treatment for some vacation homes

On Wednesday, May 30, 2007, the US Tax Court handed down a ruling on the appeal by a Georgia couple to allow the sale of their vacation home to qualify for treatment under the rules of IRS Section 1031, Tax Deferred Exchange.  The court found that "the holding of any residence, even if motivated in part by an expectation that the property will appreciate in value, is insufficient to justify the classification of that property as being held for investment."

What they were saying was that if you buy a vacation home for personal use and plan on treating it as an investment property, that the potential appreciation by itself is not enough to qualify it as other than a personal residence. 

The court wrote that "the mere hope or expectation that property may be sold at a gain cannot establish an investment intent if the taxpayer uses the property as a residence."  It stated that in this case the primary purpose was to enjoy the use of the property as a vacation home, and therefore it did not qualify. 

Of course, every client should seek counsel from his tax advisor, and I have always suggested it, especially with a client who did not rent his or her property.  It has been a grey area for a long time and it is good to know that there is finally a ruling on it.  The entire ruling can be found at www.ustaxcourt.gov/InOpHistoric/Moo8re.TCM.WPD.pdf