Court rulings on 1031 Exchanges

We have two sources of guidance for the application of Section 1031 to vacation homes -- a letter ruling and a tax court case. In 1981 the IRS issued a Letter Ruling (Ltr Rul 8103117) that allowed a 1031 exchange on a vacation home that was sold and replaced with another vacation home. The Old Vacation Home that was sold had not been rented for the six or seven years prior to the exchange, and had been held for both "personal enjoyment" and as a "sound real estate investment." The New Vacation Home that was purchased was also intended to be held for the same personal enjoyment and investment intent.

All of these questions appear to have been answered in a recent U.S. Tax Court case (Rivera v. Commissioner). This case is significant because the U.S. Tax Court is, if you will, "The Supreme Court" of tax law, so the weight of this decision is heavy. (Although that being said, this is a Summary Opinion and carries only persuasive support -- albeit a strong one -- and not the actual precedence of law.)

The property involved in this case is a vacation home near the Lake Tahoe ski and vacation area of Truckee, California. The property had very little rental activity during the two years of the case, as well as the five or six prior years. And most of those days were personal use days by the owners; rental activity was minimal.