Skip to main content

Can I Do A 1031 Exchange On My Vacation Home?

                                                                                          Prove your intent


The first thing the IRS examines in a 1031 exchange is your intent. The intent with which you purchase a property and use it plays a significant role in determining whether or not you will qualify for a 1031 exchange. Properties utilized for personal use don't qualify for a 1031 exchange. Only those properties that are held for use in trade, business, or investment purposes are eligible for a 1031 exchange.
What does the 'Safe Harbor Rule' say?

In 2008, the IRS included the safe harbor rule to the initial tax code. The rule states that so long as the investor adheres to 1031 exchange guidelines, the IRS will not question whether a dwelling unit as property held for productive use in a trade or business or investment purposes.
Fulfilling the following requirements, you can determine whether or not your vacation property qualifies for a 1031 exchange. 

(a) The investor must own the dwelling unit for at least 24 months before opting for a 1031 exchange. This time frame is known as the 'qualifying use period.'

(b) During the qualifying use period, in each of the two 12-month duration - 

(i) The investor must rent out the dwelling unit to another person for 14 days or more at a fair monthly rental, and

(ii) The investor must not use the dwelling unit for personal use for more than 14 days or 10 percent of the number of days during the 12 months when the property was rented.
Is your vacation home eligible for a 1031 exchange?

The IRS had included the safe harbor rule to provide guidance. However, it isn't the only criteria used in a 1031 exchange. Tax rules are the interpretation of case law that may vary from situation to situation. The following factors will tell you whether or not your vacation home qualifies for a 1031 exchange - 

  • Personal Use: If you let any of your family members or friends use your property without charging them any rent, your property may still qualify for a 1031 exchange. It's essential to keep records of how you used your property.
  • Occasional Use: As per the safe harbor provision, the amount of time you spend at your property while conducting repairs and improvements should be excluding personal use limits. You must keep a record of these visits as well.
  • Not producing income: Renting your vacation home is not the only way to qualify for a 1031 exchange. Many investors purchase vacation homes and hold them for appreciation. You can carefully document personal use to establish the claim of investment against the private dwelling.
  • Know your situation: There have been times when a 1031 exchange was possible, but didn't. The best way to know whether you are good to go for a 1031 exchange or not is to do your research and speak to a 1031 exchange expert or a QI.

Bottom Line - 

When doing a 1031 exchange on a vacation home, it's required to prove investment intent. The safe harbor rule explains the 1031 exchange eligibility of vacation homes. However, other factors may also impact qualification. Therefore, whether you sell or purchase a vacation home using a 1031 exchange, you must prove that the property is held for use in business, trade, or for investment purposes. Your intent is what matters the most and which can qualify your vacation home for a 1031 exchange.



Labels:
Location: United States

Comments

Post a Comment

Popular posts from this blog

TIC 1031 Exchange - How to do it?

What is Tenants-in-Common? Tenant-in-Common (TIC) is a type of ownership in which investors receive undivided fractional interest in larger properties, similar to DSTs, but with fewer limitations attached to the property. Accredited investors who want potential appreciation through an add-on asset, not caring about current income and diversification, should invest in TIC properties. The minimum investment for TIC 1031 Exchange Properties starts as low as $1M. How Does It Work? Many real estate agencies structures and help investors do a 1031 exchange into TIC properties. These properties are viewed as top-ups that can either substantially enhance the condition of property following an acquisition, redevelop the asset, or work through renegotiating leases. No more than 35 investors are allowed in a TIC agreement. Generally, TIC properties differ from one another in terms of property type and investment strategy of the real estate agency handling the TIC. Benefits of Tenan
Post a Comment
Read more

5 ESSENTIAL TIPS FOR A PROFITABLE 1031 EXCHANGE

1. Appoint a QI before selling your property Every step of a 1031 Exchange transaction, whether it's selling the relinquished property or the identification and purchase of the replacement property, needs to be performed with the help of a Qualified Intermediary (“QI”). A QI is essential for a profitable 1031 Exchange transaction. QI helps you to smoothly complete the otherwise complicated 1031 real estate exchange process, ensuring that all the IRS guidelines are correctly followed. A QI needs to be an independent entity bound by a written agreement with the investor to perform the exchange transaction. 2. Begin early After completing more than 150K+ successful 1031 Exchange transactions, the first advice we give to our clients is - "Start searching for replacement properties before you close. The 45-day identification period gets over instantly." 3. 1031 Exchange Time Period Guidelines IRS has issued precise identification period guidelines for a succes
Post a Comment
Read more

How 1031 Exchange into DST works?

How a 1031 Exchange Investment Works The properties can be used both as a business or a real estate investment that is exchanged under 1031 exchange. Capital gain taxes can be deferred On the sale of commercial property under the  1031 exchange   investment  of the investor. To avoid the capital gain taxes, the investor has to sell the property and reinvest the proceeds to buy property of equal or greater value and a like-kind property. The taxpayer has to identify the property within 45 days and has acquired the property within 180 days to defer capital gain taxes. There are eight steps or processes involved in the completion of the 1031 exchange , Although in real estate, 1031 exchange is commonly used. For an investor, a professional typically completes the step of the 1031 exchange as it is a complicated process. We will discuss the types of professionals to rely on during a 1031 like-kind exchange in the section below. The 8 steps involved in the  1031 exchange investm
Post a Comment
Read more