Under what circumstances may vacation homes receive tax-deferred treatment?
Vacation homes may be considered “qualified use” property and entitled to full 1031 tax-deferment if personal use is minimal (no more than 14 days per year or 10% of the number of days each year the property is rented at FMV) and it is maintained as a bona fide rental property for one year or preferably longer. While no fixed holding period is set, establishing a strong showing of a proper purpose is vital. Exchangors trading into a second home or vacation property from “qualified use” property, may, after an adequate “holding period,” later convert it to personal residence property under Section 121 to exclude gain on resale; but only after five years, less any depreciation taken. Another provision of the tax law (Section 280A) should permit limited tax-deferment of that portion of gain realized on a sale allocable to the rental activity when the taxpayer uses vacation property both for personal use for more than 14 days per year and as a rental . The importance of detailed record kee
