The Internal Revenue Service has issued Revenue Procedure 2008-16, which provides a safe harbor under which the IRS will not challenge whether a property that is rented to others but also occasionally used by the owners for personal purposes qualifies as property that may be exchanged in a like-kind exchange under Section 1031 of the Tax Code.
Section 1031(a) provides that no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment (relinquished property) if the property is exchanged solely for property of like kind that is to be held either for productive use in a trade or business or for investment (replacement property).
If a taxpayer files a federal income tax return and reports a transaction as an exchange under Section 1031, based on the expectation that a dwelling unit will meet the qualifying use standards, and subsequently determines that the dwelling unit does not meet the qualifying use standards, the taxpayer, if necessary, should file an amended return and not report the transaction as an exchange under Section 1031.
The safe harbor applies only to the determination of whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment under Section 1031. A taxpayer utilizing the safe harbor also must satisfy all other requirements for a like-kind exchange under Section 1031 and its regulations. The revenue procedure is effective for exchanges of dwelling units occurring on or after March 10, 2008.