Using a 1031 exchange for a vacation home has been a hotly debated topic for many years. In order to qualify for 1031 exchange, it must be used in trade or business or for investment. If one uses the vacation home for solely personal use, it will not qualify for 1031 exchange. But, there are some significant exceptions, and we have found that most clients fit into those exceptions.
In 2008, the IRS created guidelines for whether vacation homes can use a 1031 exchange. For both the relinquished and replacement properties, the home must have had a holding period of 24 months right before the exchange. In addition, at least once in each 12 month period, the vacation home must be rented to another person at a fair price for at least 14 days or more. If rented to a family member, the vacation home can still qualify for 1031 exchange if it’s rented at a fair market rent and the family member doesn’t use it as a vacation home. The owner also is not permitted to stay in the vacation home for over 14 days or 10% of the days in each 12 month period that the house is rented. For example, if the homeowner rents the vacation house out for 250 days, then he or she can use it for up to 25 because that’s 10% of 250. If both vacation homes follow these guidelines, then one is able to use 1031 exchange for a vacation home. If one buys a vacation home for the purpose of selling it at a later date but never rents it out, it does not qualify as investment property and can’t be used as investment property.
So, 1031 exchanges can be used for vacation homes as long as the personal use is relatively minimal and the vacation home was rented for at least 2 weeks every year for 2 years. Most AIRBNB or VRBO type rentals will therefore qualify. Here at Brazos 1031 Exchange Company, we’re ready to help you with any questions you have. Call us today at 888-508-1901 to get started or fill out our online contact form.