Can You Swap Vacation Homes Tax-free?
Under a special tax law provision, you can exchange like-kind properties without paying any current tax. Both the relinquished property and the replacement property must be investment or business property.
New ruling: The IRS says that a vacation home constitutes investment property for this purpose if it meets the following two-part test:
1. You must have owned the property you are giving up for at least 24 months before the exchange and the new property for at least 24 months afterward.
2. For the two 12-month periods immediately preceding the exchange, you:
*rent the home at a "fair" rental price for 14 days or more; and
*keep your personal use below the greater of 14 days or 10% of the number of days that the home is rented at a fair rental price.
However, the IRS may still deny tax-free treatment if you show minimal effort to treat either place as investment property.