One of the most frequently asked questions about 1031 Exchanges is whether a vacation property qualifies. The IRS introduced three basic rules in 2008 that determine if a vacation home can be included in a 1031 Exchange.
To qualify as relinquished property in a 1031 Exchange, the vacation home must meet the following criteria:
Ownership Requirement: The property must have been owned by the taxpayer for at least 24 months immediately before the exchange.
Rental Requirement: The vacation home must have been rented at fair market value for at least 14 days in each of the two 12-month periods leading up to the exchange.
Personal Use Limitation: The taxpayer cannot have personally used the property for more than 14 days or 10% of the days it was rented out (whichever is greater) during each of the two 12-month periods.
The rules for using a vacation home as a replacement property are identical to those for the relinquished property. Specifically, the property must be held for at least 24 months after the exchange, rented at fair market value for at least 14 days each year, and the taxpayer cannot use the home for personal purposes beyond 14 days or 10% of the rental days (whichever is greater) within each 12-month period.
There is a small exception that allows the taxpayer to exceed the 14-day or 10% personal use limit if the additional days were spent on improvements or maintenance to the property. If a taxpayer intends to use this exception, it’s essential to keep all receipts for any maintenance or improvements made during their stay to ensure compliance if the transaction is reviewed.
By following these guidelines, a vacation property can qualify for a 1031 Exchange. However, because of the complexity of these rules, it is highly recommended that anyone considering a 1031 Exchange involving a vacation property consult with 1031 Asset Solutions. Give us a call today at 844-401-1031.
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