Vacation homes can qualify for a 1031 exchange, but the rules are strict. The IRS has specific safe harbor guidelines that determine whether a vacation property is considered an investment property or a personal residence. Understanding these rules before you sell is critical.
The IRS Safe Harbor Rules
Under Revenue Procedure 2008-16, a vacation property qualifies as investment property if: (1) you own it for at least 24 months before the exchange; (2) in each of the two 12-month periods, you rent it out at fair market value for at least 14 days; and (3) your personal use does not exceed 14 days or 10% of the rental days, whichever is greater.
- Own the property for at least 24 months
- Rent at fair market value for at least 14 days per year
- Personal use must not exceed 14 days or 10% of rental days
- Same rules apply to the replacement property
What Happens If You Don't Meet the Safe Harbor?
Failing to meet the safe harbor does not automatically disqualify your exchange, but it means the IRS will scrutinize your intent more closely. We can review your specific situation and advise on whether your property is likely to qualify.
Vacation Home 1031 Exchanges: The Safe Harbor Rules Explained
Steve walks through the IRS safe harbor rules for vacation property exchanges, explains what happens if you don't meet the safe harbor, and provides strategies for qualifying your vacation home for a 1031 exchange.
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