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Vacation Property & Second Home 1031 Exchange Guidelines

by Allison Simson

I’ve had lots of questions lately about 1031 tax deferred exchanges and thought it might be time for an update!  This information is from Bankers Escrow Corp and Mary Lou Schwab.   

Great News! The I.R.S. will not challenge whether a vacation property or second home qualifies for a Section 1031 Exchange if certain specified ownership and use requirements are met.  The I.R.S. released Revenue Procedure 2008-16 providing definite guidelines for a safe harbor 1031 exchange. 

To meet the safe harbor requirements, a taxpayer, during the 24 months prior to the sale or after the purchase of a vacation property or second home must:

  1. Rent the property at fair market rent for a minimum of 14 days during each 12 month period of the 24-month period.
  1. Taxpayer’s personal use of the property cannot exceed the greater of 14 days per year or 10% of the days the property is actually rented during each of the two 12-month periods before or after the 1031 exchange.

 

Personal use is defined as:

  • Use by the taxpayer or any other person who has an interest in the vacation or second home property, including a tenant-in-common interest.
  • Use by any individual who uses the property under an arrangement which enables the taxpayer to use some other property.  No trading places allowed!
  • Use by any member of the taxpayer’s family unless the vacation property is rented out as a primary residence at a fair market rent.
  • Use by any other individual if rented for less than fair market rent.

Maintenance days do not count as personal use days. If the taxpayer is engaged in repair, upkeep and annual maintenance on a substantially full time basis for any day, a personal day is not claimed.  The taxpayer must be ready to prove that the actual work was done and this can include overseeing a contractor that is providing the work on the property.

In summary, a taxpayer can take a second home or a vacation property and rent it at fair market value for 14 days per year for two years and then exchange out of it. Remember that personal use must be limited during these two years.  Revenue Ruling 2008-16 provides these guidelines for a safe 1031 exchange.  Taxpayers must also satisfy all other requirements for a like-kind exchange. Always check with your tax advisor before engaging in any 1031 exchange transaction.

Mary Lou Schwab is a CPA and a Certified Exchange Specialist.  She oversees the 1031 division at Bankers Escrow Corp. and can be reached at 800-571-6595 or 303-986-4848.

For answers to your real estate questions, call Allison at 970-468-6800. Email - [email protected]. Her philosophy is simple, whether buying or selling, she understands that the most important real estate transaction is yours.  Want to know the value of your Summit County property? Visit www.SummitHomeValue.com  

Quarterly Sales Report for your area is available!

by Allison Simson

Summit Real Estate's Quarterly Sales Reports are here!

It is our pleasure to keep you informed on Summit County’s Real Estate Market.
Click the hyperlink below, fill out the information required and you will automatically be directed to the sales reports for Summit County.

Summit Real Estate Quarterly Report

We value your opinions and comments.  Let us know what you think!

 

 

 

For answers to your real estate questions, call Allison at 970-468-6800. Email - [email protected]. Allison is a long time local in Summit County. Summit Real Estate – The Simson Team is located at the Dillon Ridge Marketplace. Allison’s long-time residency and years of real estate experience can help you make the most of any buying or selling situation. She’s a Certified Residential Specialist (CRS), the highest designation awarded to a Realtor in the residential sales field.  Her philosophy is simple, whether buying or selling, she understands that the most important real estate transaction is yours.  Want to know the value of your Summit County property? Visit www.SummitHomeValue.com  

 

Question:  Allison, we have had our Silverthorne, CO home on the market for several months with lots of showings, but no offers.  We feel like our price is right – do you have any other ideas for us?

Answer:  Thanks for asking…of course, correct pricing is the #1 thing you can do to increase the likelihood of a sale, but here’s another idea that I have been using recently with good results:  Write a love letter to you buyers!

According to Tara Nicolle with Inman news, recent reports suggest that the real estate market might be picking up in the nation.  While we do tend to lag behind the national market by 12-18 months and our prices are still declining slightly, we are seeing some good energy here in the mountains.  That said, sellers from coast to coast are still doing everything within their power to differentiate their home from the scads of other competitive listings.

As someone who has been inside probably thousands of homes with buyers over the years, I've always thought there was one super-simple, vastly underrated marketing technique for homes that are having a hard time standing out from the rest of the market: the seller love letter.

A seller love letter is a note, personally written or typed up by the home's seller. Among other things, it expresses the love the seller's family has had for the home, and explains the facts and events underlying that sentiment.

I've seen these be as short as a single page, and as long as a binder containing a 10-page letter and a collection of supporting pictures and other documents.

If the power of staging lies in depersonalizing the property so buyers can picture their own family living out their own lives in the home, the power of a seller love letter is that it leaves buyers with a warm feeling that the home has a positive energy and history, which is especially desirable on today's distressed property-riddled market.

Here are six things smart sellers should consider including in their love letters about their homes to their buyers:

1. Fond family memories. Now, there's no reason to get all "TMI" (too much information) about it, but the fact is that buyers do love to hear sweet, fond family memories about a property. I've watched with my own two eyes as buyers who liked a 100-year-old home fell desperately in love with it as they read about the seller's parents' building the home, and then raising a flourishing family there.

Even much newer homes can have their own endearing stories, whether they be about a hard-charging professional bachelor who is moving out of a loft to start a family; about retirees who raised their kids there and are now moving to downsize and be near their grandkids; or about a smart, single woman who was the first person in her family to own a home.

The goal here is to create warm fuzzies while you satisfy the buyer's craving to know why on earth anyone would want to move from such a lovely place. And if you can tell a happy story, you can kill another bird with a single stone – distinguishing your place from all the tragic stories and sadness surrounding the short sales and foreclosures with which your home is competing.

2. Favorite neighborhood vendors and local businesses. One reason people dread moving so much is that it forces them to find new vendors for everything, especially for the practicalities and minutiae that can derail our schedules and lives if they don't run well. If you have neighborhood businesses you love, making a list of them and including them with your love letter is very much appreciated by buyers.

Take care to include things like: dry cleaners, house cleaners, landscapers, carpet cleaners, produce markets and butchers, and especially restaurants that have great take-out and delivery services.

You get extra points if you know the proprietor and authorize the buyer to drop your name, or you include menus with your list of restaurants that deliver to the property address.

3. Lifestyle amenities that map to local buyer wish lists. Give some thought to the sorts of things people looking to buy a home like yours might be looking for, from a lifestyle perspective, and include notes about any of those amenities in the neighborhood that you and your family or housemates have especially enjoyed. Things like favorite ski runs, playgrounds, running trails, yoga studios, libraries and bookstores, sailing and outdoor recreational opportunities make great fodder for this list.

4. History of upgrades. Of course, your state-required disclosure forms will include a pithy section for relating the repairs and upgrades you've done in the time you owned the property, but you can take that to a new level in your seller love letter with a free-form description of the work, color commentary (if it makes sense) around why and how you had it done, and a little appendix that includes any relevant plans, permits warranties, receipts, service contracts and the like.

(Obviously, you don't want to include the originals of these items if this love letter document will be left out in the property during showings.)

If there are any issues or repairs that are likely to come up in the buyer's inspection reports that you want to explain in more detail, the love letter can give you your chance to do just that.

5. Property details and tricks. If you have a detailed landscape plan that identifies all the plants and trees in your yards, tricks for how to work the heating and cooling timer or the tricky downstairs doors, details on when the neighborhood trash pickup happens, or info about your alarm, termite or other service contracts, prospective buyers will feel well taken care of if you compile and include all this information with your love letter and let them see it before they even make an offer.

6. Neighbors. If you have particularly close and friendly relationships with any specific neighbors, or there are block parties, online or email groups, homeowners association (HOA) or neighborhood watch meetings or other favorites, ones with kids, block party, watch meetings, other things being planned/organized, let the buyers know.

You see, a good seller love letter is equal parts lovey-dovey and logistical, but the care that goes into preparing it and the love that is evident in its content can be a significant selling point to buyers weary of dealing with bank sellers or stressful short-sale situations.

Whatever you do, if you decide to write a seller love letter for your home, review your plans and thoughts about what to include with your real estate Broker first. You want to make sure not to run afoul of any equal opportunity housing laws or disclosure laws.

As well, waxing rhapsodic about all the weekends you invested in the terrible mural on the wall might be more concerning than compelling to buyers who think they could live in your home easily -- assuming they paint over the mural on day one as the new owners.

Let the buyers know why you love the place and they might fall in love with it, too!

 

For answers to your real estate questions, call Allison at 970-468-6800. Email - [email protected]. Her philosophy is simple, whether buying or selling, she understands that the most important real estate transaction is yours.  Want to know the value of your Summit County property? Visit www.SummitHomeValue.com  

Tax break for owners occupying a rental has changed

by Allison Simson

Q. Allison, I bought a rental home three years go and have been renting it out ever since. If I move into the home now and live in it for two years and then sell it, will I qualify for the full $250,000 home-sale exclusion?

A.The short answer is:  No. The maximum Section 121 exclusion you'll qualify for is $100,000 (40 percent of the full $250,000 exclusion for single taxpayers). I don’t claim to be a tax expert (quite the opposite, really!) but I came across this article by Steven Fishman that might be interesting to you:

One of the greatest boons in the tax code for the average person is the Section 121 home-sale exclusion. Homeowners who qualify for it don't have to pay any income tax on up to $250,000 of the gain from the sale if they're single, or up to $500,000 if they're married filing jointly.

Qualifying for the Section 121 exclusion is simple: You just have use the home as your principal residence for at least two years of the prior five years before it's sold.

As Section 121 was originally enacted in the 1990s, this meant that you could buy a house, rent it out for three years, live in it for two years, and then sell it and qualify for the entire Section 121 exclusion. Thus, you could avoid having to pay tax on up to $500,000 of otherwise taxable gain. And you could do this over and over again. However, those days are gone.

Section 121 was amended in 2008. For sales and exchanges after Dec. 31, 2008, gain from the sale or exchange of a principal residence allocated to periods of nonqualified use is not excluded from gross income. Nonqualified use means any period in 2009 or later where neither you nor your spouse (or your former spouse) used the property as a main home.

Example: You purchased a home on Jan. 1, 2009, and rented it out until Jan. 1, 2012, when you moved in and made it your main residence. You sell the home on Jan. 1, 2014 for a $100,000 gain. During the five years you owned the home there were three years of nonqualified use. Because three of five is 60 percent, only 40 percent of the $100,000 gain -- $80,000 -- can be excluded under Section 121.

However, nonqualified use does not include any portion of the five-year period in the two-out-of-five-year Section 121 exclusion that falls after the home is used as the principal residence of the taxpayer or spouse. In other words, if you live in the home and then rent it out, the periods of rental use after you lived in the home aren't a nonqualified use and your Section 121 exclusion won't be affected.

For answers to your real estate questions, call Allison at 970-468-6800. Email - [email protected]. Her philosophy is simple, whether buying or selling, she understands that the most important real estate transaction is yours.  Want to know the value of your Summit County property? Visit www.SummitHomeValue.com  

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Summit Real Estate
The Bright Choice
330 Dillon Ridge Way, Suite 10
Dillon CO 80435
970-468-6800
800-262-8442
Fax: 970-468-2195

Allison Simson, Owner/Broker, is a licensed Colorado Real Estate Broker