Revenue Procedure 2008-16

Under § 1031(a) of the Internal Revenue Code, no gain or loss is recognized if a property held for productive use in a trade or business or for investment (i.e., relinquished property) is exchanged for a property of like kind that is to be held either for productive use in a trade or business or for investment (i.e., replacement property). Revenue rulings and revenue procedures issued by the Internal Revenue Service (IRS) had previously indicated that § 1031 did not apply to property used solely as a personal residence because residences are not held for productive use in a trade or business. Additionally, the United States Tax Court had held that exchanges of personal residences do not qualify as like-kind exchanges for purposes of § 1031, rejecting a taxpayer’s assertion that the taxpayer’s residence was being held for investment because the taxpayer expected the residence’s value to increase. A federal appellate court had also explained that using a property as a personal residence is incompatible with holding that property for investment. Over time, however, the IRS recognized that taxpayers may hold dwelling units (i.e., houses, apartments, condominiums, or other similar types of property) primarily to produce rental income, with only occasional use for personal purposes. Therefore, the IRS issued a revenue procedure to establish a safe harbor under which a dwelling unit could qualify as property held for productive use in a trade or business or for investment for purposes of § 1031.