The IRS recently issued a ruling that will force second home owners to rent their properties if they want to sell and do a 1031 tax deferred exchange into another property. With two years of rentals and only 14 days or less of owner use per year, they will be able to do the exchange and defer taxes (assuming they will rent the replacement property as well). In the past, the rules were not clear, and many who only rented occasionally and had a lot of owner use went ahead and did the 1031 as there was nothing that said that it would not be allowed.
The new ruling may have an impact on people who do not use their second homes much anyway. I would think that, if they intend to sell in the future, they would make sure they have the two years of records showing owner use vs rentals. In my market, many people live only an hour or two away, and use their second homes much more than 14 days a year. They will not be willing to curtail their use, and may just bite the bullet and pay the taxes if they sell. Perhaps they will decide not to sell, and just hold on to it to avoid paying the taxes. The good news in most resort areas will be that there is a gain on which to pay taxes, unlike many metropolitan areas of primary residences.
The lines between second home and rental property are now going to be much more clearly defined!
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