Like-Kind Exchange Rules Do Not Apply to Vacation Homes

By David & Mary Mellem, EAs

Mr. & Mrs. Moore purchased real estate (vacation home) in 1988. This property was located approximately 3 hours from their principal residence. About 1996 they changed their principal residence to another city in the opposite direction from the vacation home. Due to the longer travel to get to the vacation home, in 2000 they disposed of the old vacation home and obtained a new one closer to their new principal residence. They used an escrow agent to facilitate a like-kind
exchange of their old vacation home for the new one.

IRS denied the like-kind exchange treatment, assessing Mr. & Mrs. Moore tax on the gain from the sale of their old vacation home.

The taxpayers stated they had purchased both the old and the new vacation properties partly due to the increasing values in their respective neighborhoods.

The taxpayers and their families had used the properties a couple of weekends in March getting it ready for the summer, then 2-3 weekends a month through Labor Day when it was closed down for the winter. Mr. Moore would occasionally visit between Labor Day and March to rake leaves and perform other caretaker functions. The properties were never rented out. They installed a satellite dish, built on a deck, brought furniture from home to furnish the property, kept a boat at the properties, and generally had a good time for the summers. The interest on the mortgage was claimed as qualified home mortgage on Schedule A. They did not claim any deductions for investment expenses in relation to either property.

Their loan with the bank had the property listed as “second home”.

Tax Court stated although the taxpayers stated the properties were purchased partly for investment, the actions over the years and the treatment on their income tax returns for the interest and other expenses showed the property was personal use property and not property held for investment. Tax Court agreed with IRS that conditions of §1031 (like-kind exchange) were not met the properties were not properties held for investment or business purposes and did not qualify for the §1031 treatment.

Barry & Deborah Moore, TC Memo 2007-134, You can find this case at www.ustaxcourt.gov by clicking on ”Opinions Search” and entering “Moore” in the case name box.
https://www.ustaxcourt.gov/InOpHistoric/Moo5re.TCM.WPD.pdf

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This text has been shared with you courtesy of: David & Mary Mellem, EAs & Ashwaubenon Tax Professionals,
920-496-1065 (fax 920-496-9111) davidmellem@yahoo.com,
davidmellemea@yahoo.com, marymellemea@yahoo.com, and
marymellem@yahoo.com.

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David L. Mellem, EA

Ashwaubenon Tax Professionals
2140 Holmgren Way
Green Bay, WI 54304
920-496-1065 – – fax 920-496-9111
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