## Facts

- The Internal Revenue Service issued a revenue procedure establishing a safe harbor for like-kind exchanges under I.R.C. § 1031 involving “dwelling units,” including vacation homes with mixed rental and personal use.
- The guidance responds to uncertainty in determining when a dwelling unit is “held for” investment or productive use in a trade or business, as opposed to a personal residence ineligible for § 1031 nonrecognition.
- A “dwelling unit” is real property with basic living accommodations (sleeping space, bathroom, and cooking facilities).
- “Personal use” is generally determined by reference to I.R.C. § 280A(d)(2), including use by the taxpayer and certain related persons, and use at less than fair rental value.
- The safe harbor applies to exchanges occurring on or after March 10, 2008, and states that no inference is intended for exchanges before that date.
- The safe harbor is expressly non-exclusive: failure to satisfy it does not automatically preclude § 1031 treatment; the transaction is then evaluated under general facts-and-circumstances principles.

## Issues

1. Under what objective conditions will the IRS treat a dwelling unit with some personal use as property held for productive use in a trade or business or for investment for purposes of I.R.C. § 1031?
2. What minimum rental use and maximum personal use thresholds must be met for the IRS to refrain from disputing § 1031 qualification for both relinquished and replacement dwelling units?
3. What is the scope and effect of the safe harbor, including its effective date and non-exclusive nature?

## Decision

- The IRS announced a safe harbor under which it will not challenge a taxpayer’s position that a dwelling unit is qualifying § 1031 property if specified ownership, rental, and personal-use requirements are satisfied.
- For a relinquished dwelling unit, the safe harbor requires:
  - Ownership by the taxpayer for at least 24 months immediately before the exchange; and
  - In each of the two 12-month periods within that 24-month period:
    - Rental to another person at a fair rental for 14 days or more; and
    - Personal use not exceeding the greater of 14 days or 10% of the days rented at a fair rental.
- For a replacement dwelling unit, the safe harbor requires:
  - Ownership by the taxpayer for at least 24 months immediately after the exchange; and
  - In each of the two 12-month periods within that 24-month period:
    - Rental at a fair rental for 14 days or more; and
    - Personal use not exceeding the greater of 14 days or 10% of the days rented at a fair rental.
- The revenue procedure applies prospectively to exchanges on or after March 10, 2008, without changing stated treatment for prior exchanges.

## Legal Principles

- I.R.C. § 1031(a) allows nonrecognition only for exchanges of property held for productive use in a trade or business or for investment, exchanged for like-kind property to be held for similar qualifying purposes.
- A dwelling unit used solely as a personal residence is not qualifying property for § 1031.
- A taxpayer’s expectation of appreciation alone does not establish investment intent when the property is used as a residence.
- Under the safe harbor, objective rental and personal-use thresholds function as administrable proxies for qualifying “held for” status:
  - Minimum rental: 14 or more fair-rental days in each relevant 12-month period.
  - Maximum personal use: no more than the greater of 14 days or 10% of fair-rental days in each relevant 12-month period.
- The safe harbor is non-exclusive; transactions outside it are assessed under general legal standards based on the taxpayer’s facts and circumstances.
- The safe harbor is effective only for exchanges occurring on or after March 10, 2008, and is not intended to imply outcomes for earlier exchanges.

## Conclusion

Revenue Procedure 2008-16 provides a prospective, non-exclusive safe harbor under which the IRS will not dispute § 1031 eligibility for exchanged dwelling units when the taxpayer satisfies specified 24-month ownership requirements and, in each of two consecutive 12-month periods, rents the unit for at least 14 fair-rental days while keeping personal use within defined limits.


Rev. Proc. 2008-16, 2008-1 C.B. 547 (2008)