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You’ve Got Some ‘Splaining to Do!
In the hit show I Love Lucy, Ricky Ricardo was known for saying “Lucy, you’ve got some ‘splaining to do!” in his memorable Cuban accent. With 1031 exchanges the ‘splaining is done by substantiating your tax positions with other financial and Tax documents. The best case of substantiating comes with residential rental property, a subject we want to address before Memorial Day in honor of summer.
The Tax Court recently ruled the sale of a vacation home and the purchase of another via 1031 exchange ineligible because the homes were not held for investment (Moore, TC Memo 2007-134). It is common knowledge that for a property to qualify for a 1031 exchange it must be held for investment. The problem in this case was that the taxpayer believed “investment” constituted buying a house and waiting for it to appreciate for eventual sale. The house was not rented out (nor was any attempt made to do so) and used for personal purposes only.
The facts of the case don’t make it any prettier. The taxpayer purchased this second/vacation home three hours away from his residence. The property was utilized for recreational purposes a few times a month until Labor Day, and then ... more

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