1031 Exchanges and Vacation Homes

1031 Exchanges and Vacation Homes

Many people come to Davidson Law Group asking whether they can do a 1031 exchange with their vacation home. As a reminder, a 1031 exchange is when one investment property is exchanged for another without tax consequences. Vacation homes are a contentious issue in this realm, so today in the Davidson Law Group blog, we decided to clear up some things about 1031 exchanges and whether or not you can perform one with a vacation home.

About 1031 Exchanges

If you’re looking into a 1031 exchange for your vacation home, you’re probably already somewhat familiar with them and how they work. If not, the important thing to remember is that in order for 1031 exchanges to be valid, you must exchange for like-kind property. What this means is that you’re exchanging your property for another property of similar value or purpose. Many people will do an exchange if they want to refocus their real estate investments without incurring tax penalties. They’re certainly handy for that, but that doesn’t answer our question about vacation homes. Let’s delve a little deeper.

Related Post: Five Benefits of 1031 Exchanges

Do Vacation Homes Qualify?

The answer to this question is both yes and no. It really depends on the way you use your vacation property. In 1031 exchanges, the property being exchanged needs to be proven to be some sort of investment property. Thus, if you use your vacation home on a regular basis for personal use only, it would be considered a second home. It wouldn’t qualify for a 1031 exchange. However, let’s say you rent your vacation home out when you’re not using it. This is a good start to proving to the IRS that you bought this home with investing intent. This may not be enough to qualify it for a 1031 exchange, though. If you do eventually want to put your vacation home through the exchange process, it needs to meet a couple of conditions. The conditions are as follows: first, you have to rent your vacation home out for more than 14 days a year, and, second, you don’t use the vacation home more than 14 days a year or more than 10% of the number of days you rent it out. If these conditions are met 24 months prior to selling your vacation home, you may be qualified for a 1031 exchange.

Related Post: Understanding the Timing and Rules of 1031 Exchanges

Contact Davidson Law Group

If you’re interested in 1031 exchanges for any of your investment properties, it’s always best to consult with a professional attorney first. The team at Davidson Law Group can protect your interests and advise you on the legalities. For more information, or to schedule an appointment, contact us in Fort Worth, Allen, or Tyler today.