Mr. and Mrs. Z own three homes. They live in the San Francisco home full time. Mr. Z and his wife use the other two homes for vacation during the year. They are considering replacing the house in Palm Springs, California, with another house in the same area. The new home is a little bigger and has a better floor plan. The two Palm Springs properties have almost the same fair market value. Mr. and Mrs. Z would like to know if they can exchange the properties instead of selling the Palm Springs home and buying the new one. They have a lot of built-up appreciation in the current Palm Springs home and don't want to have to pay taxes on it. Someone told Mrs. Z at a cocktail party that she can avoid paying taxes if she and Mr. Z engage in an exchange.
Mr. Z and his wife own the home outright. There is no mortgage on the property. They use the property occasionally. During the last year they vacationed at the home for about two or three weeks - they aren't sure of the exact number of days or precisely how many different times they vacationed there. They have never rented any of their properties and have no intention of renting the new Palm Springs property. They don't need the money and don't like strangers in their house. Mr. and Mrs. Z explain that they hold each of their vacation homes for two reasons. One reason is for their vacation enjoyment. Another key reason for owning the homes is for their investment value. They choose homes in areas where they believe there are high appreciation possibilities.
Can Mr. and Mrs. Z take advantage of the tax-free exchange rules in the IRC? What would you advise them to do?
a. What relevant primary authority did you locate?
b. Does the authority adequately address the research question(s)? If so, what are your conclusions and reasoning upon which they are based?
c. Were there additional questions that required research beyond a reference service?
d. What resources did you use in your research?
e. How much time did you spend on this portion of your research?