Rev. Proc. 2008-16
Vacation homes or “second homes” offer another opportunity for the 1031 Exchange. Often one of a taxpayer’s best investments has proven to be his vacation home and yet many tax and legal experts have argued against section 1031 when it came time to sell.
Though exchanges of second homes have taken place for many years 1031‘s application to such a property has been considered a grey area. But there’s good news! In February of 2008 the IRS established guidelines for determining whether a vacation home qualifies for a 1031 exchange. Although exchanges of second homes have been done for years we now have the definitive ability to say yes, they can qualify!
Revenue Procedure 2008-16 sets forth the safe harbor guidelines as follows.
Relinquished Property
The holding period for the vacation home is at least 24 months immediately before the exchange;
For each of the two-12-month periods, the vacation home is rented to another person at a fair rental for 14 days or more; and
The homeowner limits his use of the vacation home to not more than 14 days or 10% of the number of days during the 12-month period that the vacation home is rented at a fair rental value.
Replacement Property
The holding period following the exchange is at least 24 months;
For each of the two-12-month periods, the vacation home is rented to another person at a fair rental for 14 days or more; and
The homeowner limits his use of the vacation home to not more than 14 days or 10% of the number of days during the 12-month period that the vacation home is rented at a fair rental value.
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FAQs
Vacation homes held primarily for the personal use of the owner or related parties are not eligible for a 1031 exchange. Abandoning personal use will not convert the property to investment use given the use is abandoned in order to sell the property.
Are second homes eligible for 1031 exchange? ›
Yes, a second home can qualify for a 1031 exchange, but it must adhere to specific conditions. The property should primarily be used as a business or investment asset and not for personal enjoyment. The IRS applies strict rules regarding personal usage of the property to maintain its eligibility for a 1031 exchange.
What is the biggest advantage of a 1031 exchange? ›
The main benefit of carrying out a 1031 exchange rather than simply selling one property and buying another is the tax deferral. A 1031 exchange allows you to defer capital gains tax, thus freeing more capital for investment in the replacement property.
What is the multiple property rule for 1031 exchange? ›
You can definitely buy multiple properties in a 1031 exchange. The 200 percent rule allows the investor to identify as many properties as they prefer, but the combined value of all identified assets can't exceed 200 percent of the relinquished asset's value.
What is the 2 year rule for 1031 exchanges? ›
Section 1031(f) provides that if a Taxpayer exchanges with a related party then the party who acquired the property in the exchange must hold it for 2 years or the exchange will be disallowed.
Which type of property does not qualify for 1031 exchange? ›
The property must be a business or investment property, which means that it can't be personal property. Your home won't qualify for a 1031 exchange. However, a single-family rental property that you own could be exchanged for commercial rental property.
What is the IRS rule for second homes? ›
For the IRS to consider a second home a personal residence for the tax year, you need to use the home for more than 14 days or 10% of the days that you rent it out, whichever is greater. So if you rented the house for 40 weeks (280 days), you would need to use the home for more than 28 days.
Can I convert 1031 exchange into a primary residence? ›
Property Converted from Investment to Primary Residence
First, if you acquire property in a 1031 exchange and then convert it to your primary residence, you must own it at least five years before being eligible for the Section 121 exclusion.
How long before you can move into a 1031 exchange property? ›
Real estate investors who want to move into replacement properties acquired via 1031 exchange should rent the property out for a minimum of two years to clearly demonstrate their intent that the property was purchased as an investment.
What is the downside of 1031 exchange? ›
If you do a 1031 exchange for a property less worth than the one you're selling, you'll have to pay accumulated depreciation and capital gains taxes on the boot — any money left over from your sale that didn't go toward purchasing the new property.
A principal residence usually does not qualify for 1031 treatment because you live in that home and do not hold it for investment purposes.
What are the cons of a 1031 exchange? ›
Risks of 1031 Exchanges
- More complex tax documentation. In order to conduct a 1031 exchange, you'll need to file IRS Form 8824 with your tax return. ...
- Adherence to standards and regulations. ...
- Responsibility to choose an experienced qualified intermediary. ...
- Strict timelines may apply. ...
- Some taxes may still apply.
President Biden has released his proposed budget for 2024, which again looks to eliminate 1031 like-kind exchanges.
How many properties can you name in a 1031? ›
3 Property Rule.
In most cases taxpayers use the three property rule. The taxpayer may identify up to three replacement properties and may acquire one, two or all three of those.
How many times can you do a 1031 exchange in a year? ›
A 1031 exchange is a swap of properties that are held for business or investment purposes. The properties being exchanged must be considered like-kind in the eyes of the IRS for capital gains taxes to be deferred. If used correctly, there is no limit on how many times or how frequently you can do 1031 exchanges.
Does Airbnb qualify for 1031 exchange? ›
Does Your Airbnb Qualify? Real estate that qualifies for the powerful tax deferral of the 1031 exchange must be property that you intend to hold for productive use. Renting out your property exclusively as an Airbnb clearly demonstrates the intent of generating income.
Can a 1031 property be converted to a personal residence? ›
Property Converted from Investment to Primary Residence
First, if you acquire property in a 1031 exchange and then convert it to your primary residence, you must own it at least five years before being eligible for the Section 121 exclusion.
What is the minimum rental period for a 1031 exchange? ›
Real estate investors who want to move into replacement properties acquired via 1031 exchange should rent the property out for a minimum of two years to clearly demonstrate their intent that the property was purchased as an investment.
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
