The 82/11 Safe Harbor for 1031 Vacation Home Exchanges

The term “82/11” refers to IRS Revenue Procedure 2008-16, which established a safe harbor for using vacation homes in a 1031 exchange. A safe harbor is a set of rules that, if followed, prevent the IRS from challenging whether a property qualifies. A Section 1031 like-kind exchange allows an owner of investment real estate to sell a property and defer capital gains taxes by reinvesting the proceeds into a similar replacement property. This guidance provides certainty for taxpayers using a property that has personal use, such as a vacation home.

Qualifying a Relinquished Property Under the Safe Harbor

To qualify the property being sold, known as the relinquished property, under the safe harbor, a taxpayer must satisfy specific tests over the 24-month period immediately before the exchange. The first is an ownership test, requiring the taxpayer to have owned the dwelling unit for at least 24 months. This timeframe is known as the “qualifying use period.”

Within that 24-month window, the property must also meet a rental use test for each of the two 12-month periods. This test requires the taxpayer to rent the dwelling unit at a fair rental price for 14 days or more in each of those two years. Days spent performing maintenance or repairs on the property do not count toward this rental minimum.

The final requirement is a strict limitation on personal use. In each of the two 12-month periods, the taxpayer’s personal use of the home cannot be more than the greater of 14 days or 10% of the total days the property was rented at fair market value. For example, if a home was rented for 200 days in a year, the owner could use it personally for up to 20 days (10% of 200). If the home was only rented for 100 days, personal use would be capped at 14 days, since 14 is greater than 10% of 100 (10 days).

The IRS defines “personal use” broadly under IRC Section 280A. It includes:

• Use by the taxpayer, their family members, or any other person with an interest in the unit.
• Use of the property under a reciprocal arrangement that allows the taxpayer to use another dwelling.
• Use by any individual who pays less than a fair rental price.

An exception exists for a family member who rents the property as their principal residence at fair market value.

Post-Exchange Requirements for the Replacement Property

The safe harbor’s requirements do not end with the sale of the original property. The newly acquired replacement property must meet the same ownership, rental, and personal use qualifications as the relinquished property. These tests are applied prospectively to the 24-month period immediately following the exchange.

Failing to satisfy these post-exchange requirements has significant consequences. The taxpayer may need to file an amended tax return and report the original transaction as a taxable sale. This retroactively invalidates the tax deferral, which can result in a substantial tax liability plus interest and penalties.

Required Information and Documentation

A taxpayer must maintain detailed records to prove compliance with the ownership, rental, and personal use tests for both properties. This documentation should cover the entire 48-month period that spans the pre-exchange and post-exchange timelines.

A detailed log should track the use of the property for each day of the qualifying periods, categorizing each day as personal use, rental use, or maintenance. For rental days, taxpayers should keep copies of rental agreements and bank statements showing the receipt of fair market rental income. These records provide direct evidence that the tests were met.

The exchange must be reported on IRS Form 8824, Like-Kind Exchanges, for the year it occurs. To complete this form, taxpayers need specific information, including detailed descriptions of both properties, their acquisition and transfer dates, and their fair market values. The form also requires calculations of any realized gain and the tax basis of the new property.

The Facts and Circumstances Alternative

Failing to meet the safe harbor’s strict criteria does not automatically disqualify a 1031 exchange. Instead, the transaction falls back to the traditional method of evaluation: the “facts and circumstances” test. This method is more subjective and places a greater burden on the taxpayer to prove the property was held for investment purposes.

Under this alternative, the IRS analyzes the taxpayer’s intent by assessing various factors. The IRS may examine the taxpayer’s history as an investor, how the property was managed and advertised, and whether the motivation for ownership was financial gain or personal enjoyment. The hope for appreciation in value alone is generally not sufficient to establish investment intent.

This approach offers flexibility but lacks the certainty of the safe harbor. A taxpayer might still succeed if they have a clear history of treating the property as an investment, even if they miss a specific threshold due to unforeseen circumstances. The safe harbor provides an objective path to approval, while the facts and circumstances test relies on a persuasive argument.