Investment Blog

Vacation Homes and 1031 Exchanges

A 1031 Exchange is designed to defer taxes on the sale of "like kind" real estate investments.  For a definition of "like kind" view section 1.1031(a)-1(b) of the IRS Regulations.

This IRS 1031 code may be available for vacation home owners that wish to defer capital gain taxes on the sale of this type of property.  The definition of qualifying properties is whether the property sought to be exchanged is held "for use in a trade or business, or for investment" .  

To understand how a 1031 exchange may apply to vacation homes you can read Rev Proc 2008-16 for the details.  Here are the basic concepts from Section 4 of this Revenue Procedure:

(1) Relinquished property. A dwelling unit that a taxpayer intends to be relinquished property in a § 1031 exchange qualifies as property held for productive use in a trade or business or for investment if:

(a) The dwelling unit is owned by the taxpayer for at least 24 months immediately before the exchange (the “qualifying use period”); and

(b) Within the qualifying use period, in each of the two 12-month periods immediately preceding the exchange,

(i) The taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and

(ii) The period of the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental.

For this purpose, the first 12-month period immediately preceding the exchange ends on the day before the exchange takes place (and begins 12 months prior to that day) and the second 12-month period ends on the day before the first 12-month period begins (and begins 12 months prior to that day).

(2) Replacement property. A dwelling unit that a taxpayer intends to be replacement property in a § 1031 exchange qualifies as property held for productive use in a trade or business or for investment if:

(a) The dwelling unit is owned by the taxpayer for at least 24 months immediately after the exchange (the “qualifying use period”); and

(b) Within the qualifying use period, in each of the two 12-month periods immediately after the exchange,

(i) The taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and

(ii) The period of the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental.

Legal Entities

One of the most common questions that real estate investors ask is: Which entity should I use?

Here is a good basic explanation of LLC's, S Corp's, and CCorp's.

http://www.reiclub.com/articles/choice-of-entity


© Kevin Schill 2018