Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Solving the Personal Use/Investment Dilemma for Like-Kind Exchanges:
Moore v. Commissioner
In Moore v. Commissioner, the United States Tax Court held that property used as a “second home” or a “vacation home” does not constitute property held for investment for the purpose of nonrecognition of a gain or loss under section 1031 of the Code. Section 1031 provides that a taxpayer should not claim a gain or loss for the exchange of property “held for productive use in a trade or business or for investment” when exchanged for property of a like kind. Until Moore, courts had not directly addressed whether expected appreciation was sufficient to establish investment intent for the purpose of section 1031 nonrecognition. The Moore court held that the use of property for personal use defeats a taxpayer’s statement of investment intent where that intent is based on the anticipated appreciation of the property. Accordingly, many observers consider it well settled that property held primarily for personaluse cannot be considered investment property for the purpose of effecting a like-kind exchange.
While the Moore case has inspired a Treasury Inspector General for Tax Administration (TIGTA) report and a subsequent revenue procedure issued by the Service, neither resolves what constitutes an investment for purposes of section 1031. The TIGTA report suggests that the lack of clarity sustains a continuing market, spurred by promoters, of like-kind exchanges for vacation homes. Meanwhile, Revenue Procedure 2008-16 creates a safe harbor for properties primarily used for rental purposes but also used occasionally for personal use. While these documents provide additional guidance on the treatment of mixed-use properties, the Service has thus far failed to seize the opportunity to close the gap left by Congress and define what constitutes investment property under section 1031, even though such a clarification could create a more equitable tax policy and spur economic growth.
This Note suggests that although Moore was properly decided based on the specific circumstances of the taxpayers involved, an interpretation of section 1031 that encompasses property purchased for its probable appreciation, even if said property is used primarily for personal use, is both supported in the Code and more consistent with the rationale behind nonrecognition. Part I of this Note provides the factual background of Moore. Part II explores the Tax Court’s application of section 1031 to those facts. Part III analyzes the statutory and policy justifications for excluding vacation homes from being afforded nonrecognition of a gain or loss pursuant to section 1031, determining that these justifications are based on a faulty assumption that section 1031 should be sparingly applied. Part IV concludes that while Moore was properly decided on its facts, the mere use of a home as a personal residence is consistent with investment intent and should not disqualify a property from nonrecognition treatment.