Section 1031 of the Internal Revenue Code provides a remarkable opportunity to build wealth by deferring taxes. Within carefully defined limits, this section of the Code permits you to carry forward the gains you have made on one property into another one, deferring capital gains taxes and, thus, allowing the full use of your equity in the acquisition. An exchange can be much more advantageous than the sale of one property and the purchase of another.

Revenue Procedure 2008-16 became effective for exchanges as of March 10, 2008 and pertains to exchanges of vacation homes and conversions to or from personal residences. It establishes a safe harbor in the event that a vacation home can be considered investment property and traded in a §1031 exchange. The ruling states that a vacation home qualifies for a §1031 exchange if the investor owns the home for at least 24 months, rents it for at least 14 days for each 12-month period, and uses it no more than the greater of 14 days per year or 10 percent of the number of days during the year that the home is rented. These requirements apply to both the relinquished and replacement properties.

For purposes of this revenue procedure, a vacation home, also called a "dwelling unit" in the Revenue Procedure, is real property improved with a house, apartment, condominium, or similar improvement that provides basic living accommodations including sleeping space, bathroom and cooking facilities.

Interested in learning more about exchanges? Allow me to introduce you to expert Cindy Naito, Business Development Executive of First American Exchange.