To accomplish a tax-free exchange, an asset that is held for use in the taxpayer’s trade or business or for investment may be traded for “like-kind” property that is held for either business or investment purposes.  The rules for real estate trades are really liberal – real estate can be traded for real estate as long as the “use” test is met for both the relinquished and the replacement properties.  But, the rules for trades of vacation homes – properties that are used both for investment and for personal use – have never been clear.  That is, until now.  IRS has now provided a safe harbor for vacation home trades. 

To fit within the safe harbor, the taxpayer must:

• Own the relinquished vacation home for the two years prior to the exchange, and the replacement vacation home for the two years after the exchange;
• Rent each vacation home at fair market value for at least 14 days for each of the four years, and;
• Not use the vacation home for personal purposes for more than the greater of 14 days or 10% of the days rented during each of the four years.

Remember, this is just a safe harbor.  So, trades of vacation homes that don’t meet the rules could still qualify.  But, that’s probably not the way to approach the matter.  Use the safe harbor – it looks to be quite useful.  Rev. Proc. 2008-16, 2008-10 I.R.B. ___ (effective Mar. 10, 2008).