Safe Harbor for 1031 Exchange

Effective for all exchanges on or after March 10, 2008, Rev Proc 2008-16 creates a safe harbor (meaning the IRS will not challenge the exchange) for “dwelling units” that meet the following criteria:

The relinquished property:

1. Was owned by the Taxpayer for 24 months prior to the exchange, and
2. Was rented for 14 days or more in each of the two 12-month periods immediately preceding the exchange.
3. The Taxpayer’s personal use in each of those years did not exceed the greater of 14 days or 10 percent of the number of days the property was rented at fair rental rates.

The replacement property must meet the same criteria. And the exchange must meet all other §1031 requirements.

It is unknown how the IRS will view properties that do not fall within this safe harbor.