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Legal Advisory

One of the most common inquiries that I receive from across the county regarding exchanges is concerning the qualification under IRC 1031 of vacation homes being personally used. My opinion is the same expressed within my article in the May 2003 CPA Journal (Q&A #3). It is my professional opinion as a CPA-Attorney that this is not qualifying usage under this code section. However, the response typically received is that there are organizations nationally handling exchanges as Qualified Intermediary which believe this type of property does qualify. My recommendation, if this is encountered, would be to ask the exchange organization the following:

11. What is their legal basis for this opinion? Most likely, you might be advised that it is Private Letter Ruling (PLR) 8103117. Besides the fact of PLRs not having application to the general public, I have, as exchange tax counsel, great difficulty in relying on same with respect to this issue. I cite as a source one of the “bibles” for exchange counsel being a book published by California’s Continuing Education Board, Real Estate Exchanges which in the 2004 edition on page 70 is written the following with respect to their interpretation of PLR 8103117:

“Hold for investment requirement ..... intermittent personal use (e.g., less than 10 days per year) incidental to an investment purpose does not disqualify the use. IRS Letter Ruling 8103117" (emphasis added)

22. The more important question is whether the exchange organization giving the tax opinion of qualification for a vacation home being personally used is licensed to be able to represent individuals in the event of an IRS audit (including Appeals and Tax Court) should this issue be reviewed by the Service.

My saying is that I have two sets of clients for whom I assist as Exchange Tax Counsel/Qualified Intermediary - “those who eat well and those who sleep well”. However, I prefer my clients “sleeping as well as they eat”. In summary, be weary of those exchange organizations which too quickly express a tax opinion without any legal basis or are unable to represent you if IRS problems arise in the future.