Discussion:Dueling CPAs

I bought a lot in a seaside resort community in 1993 for investment. Built a house on the land in 1999 with a partner. The house has never been rented or occupied except for quarterly maintenance (2-3 days each visit). Did not want to rent the house due to bad rental experience with other property. We are talking about selling it now that home prices have substantially increased which was our original intent. I have some documentation (utility bills, gasoline purchases – the house is located 6 hours from principal residence) to substantiate the few days that the house has actually been used. Would like to do a 1031 exchange this year with the property.

Have talked with two different CPAs and am getting conflicting advice. One CPA says to file IRS form Schedule E and say the property went into rental status as of 10/2005. The other CPA says the house really went into possible rental status when it was completed in 1999 and should complete Schedule E for 2005 and could reopen previous tax years 2003 and 2004 and claim depreciation and other costs to maintain the property. Other opinions please.

ThanksT Roos 21:41, 13 March 2006 (CST)

So happy that I'm not one....!

VACATION HOME 1031 TAX EXCHANGES

  You’ve owned your vacation home for fifteen years and never rented it. You bought it for $100,000 and it is now worth $225,000. Is there any way to keep the 29% combined state and federal capital gains tax in your pocket? Actually there are three ways. 1) Make it your primary residence on your tax return for two years and then sell it. 2) Put it on a vacation rental program for a year or two and then do a Internal Revenue Code (IRC) 1031 tax-deferred exchange in which you put all the equity into a “like kind” property such as another vacation rental, a vacant lot, or a commercial or multi-family property 3) Claim that you “held it for investment” and use a 1031 exchange to buy a different vacation home.

That last one is the most controversial, but many tax advisors believe it is possible to do an exchange on a second home which has no rental history. Vacation homes around the country have gone up in value, and the IRS has allowed this type of “equity preservation” or tax deferral. There are no regulations, statutes, or court cases which give a definitive answer on the exchange of vacation homes but IRC 1221 and IRS Letter Ruling 81-031171 give a strong indication. To clarify the terminology, a “second” home is held for personal use only, and not for future profit or rental. A “vacation rental” home is occupied for personal use but also rented out at fair market rent some time during the year. It is a “vacation rental” if the owner stays there less than 15 days in the tax year or less than 10% of the rental days (whichever is greater, which only becomes an issue when you rent it out for 150 days or more). In ten years of managing vacation rentals, the IRS has never asked to see our reservation records to prove how many days an owner used their home. And how else would the IRS know? Even if you stayed there 60 days, you can document that you were “maintaining” the property for rental use by raking leaves, re-decorating, replacing a faucet washer, etc. But what if you never rented your second home? If you can substantiate that you acquired and held “unproductive real estate”, even if it was for personal enjoyment, because you expected its value to appreciate, you may qualify for a 1031 exchange. Write a letter to your CPA when you buy a vacation home saying you are acquiring it as an investment. Getting a loan for “investment property” at a slightly higher interest rate shows further intent. Document the actual annual appreciation in the area as your basis for a reasonable expectation of gain. And when you sell, put in the listing agreement that you may do a 1031 exchange. The sales contract must have a clause that you are doing a 1031 exchange

It seems that the "held for investment" and "unproductive real estate" terms are the key to this madness. Any other suggestions on how to proceed?

Thanks

Rev. Proc. 2008-16

Kevin, the past few times you have suggested 2008-16 have been on point but this time I think it does not apply. From the original post, this was not and is not a "vacation home". Taxpyaer did not use it personally.

I agree with Okie. Intent was investment property, use was investment property (not personal) so it is investment property and thus qualifies for 1031.

Also really liked Jen's points.

Fun read.

"productive use in a trade or business or for investment"