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George Saenz, the Tax Talk columnistLike-kind exchange with rental/vacation home

Dear Tax Talk,
I own a home in a college/vacation area. I hope to do a like-kind exchange in about four to five years. If I rent the house to students for 10 months per year and use it as a vacation home for two months, can it qualify for a like-kind exchange?
-- Arlene

Dear Arlene,
I don't remember my college days as a vacation; maybe I should have rented from you.

You are in a gray area. In order to qualify for like-kind exchange, a property must be held for investment or business use. Most like-kind exchange accommodators consider use as a vacation home as taking the property out of the realm of investment or business-use property.

A property is considered to be a vacation home if you, or your family, use it for personal purposes for the greater of 14 days or 10 percent of the days that it is rented at fair rental price. Since you're considering using the property for two months, this would be greater than 10 percent of the 10 months rented to students. However, if you drop down below the 10 percent for a few years, then you can probably bring the property back in within the purview of the like-kind exchange rules.

Additionally, if you don't actually occupy the home for the full two months that it is not rented, that does not count against you. For example, if you don't offer the place for rent during the student's summer vacations, but you and your family don't use it for the full two months, the period that it is available to you won't be considered as personal use. Also, days you occupy the home to perform repairs and maintenance are not counted as vacation use.

In any event, many things can happen in four to five years, which may cause your current intentions to change. Maybe you should cross that bridge when you get to it.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.'s corrections policy -- Posted: May 25, 2006
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