Could You Use Your Vacation Home for a 1031 Exchange?

a couple looking at their vacation houseSo you have a vacation home that you’d like to use for a 1031 exchange. The question is, could you? The simple answer is yes, your vacation home might qualify for a like-kind exchange considering that you follow specific guidelines and your vacation home meets certain rules. So how do you know if yours could meet the IRS’ stringent eligibility rules?

Qualification Requirements for 1031 Vacation Home Exchanges

Say, you stopped using your vacation home, lease it for several months, and then decided to exchange it for like-kind property. In this scenario, you’re now a landlord, and your vacation home is now an investment property, meaning that you could potentially use for a 1031 exchange in Nevada, notes 1031 Exchange Place. However, if you don’t actually have regular tenants, your vacation home won’t probably qualify.

The key is timing, meaning that the more time that passes after renting out your vacation home, the better. While there’s no set standard, six months to one year should be enough.

However, if you’re looking to use your exchanged property as a primary or second home, you won’t be allowed to live in it right away. According to the Safe Harbor Rule of the IRS, it won’t challenge the eligibility of a replacement dwelling as an investment property provided that it meets the Safe Harbor qualifications below:

  • You own the property for a minimum of 24 months immediately after your 1031 exchange;
  • You should rent out the property at a fair rental rate for a minimum of 14 days; and
  • Your use of the property shouldn’t exceed more than 10% of the days you’re renting out the unit or 14 days.

Other Vital Things to Know

After you’ve successfully completed a 1031 exchange using your vacation home, you won’t be able to convert your newly exchanged real estate to your primary residence and benefit from the $500,000 exclusion, as was the norm before the IRS modified the law in 2004. Currently, if you obtain real estate in a like-kind 1031 exchange and then later try to sell it as your primary home, the $500,000 exclusion won’t apply to you for five years starting from when you obtained the like-kind property. Put simply, you’d need to wait for some time to utilize the primary home capital gains tax benefit.

If you’re seriously considering a 1031 exchange using your vacation home, consult an experienced qualified intermediary to find out your property is eligible for an exchange.

Posted on by George Cummins in Money Times

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