If you own vacation property that you’d like to exchange using a 1031 exchange, there are certain rules that must be followed. Absentee ownership of short-term rentals is a bit tricky, but it can work, and our team at Diversified Investment Strategies is here to help you understand how!
The tax code for a 1031 exchange states that a property must be held for productive use in a trade or business or for investment. Therefore, you must prove that your vacation property has been used in this way, and that your time spent at the property for personal use was kept to a minimum.
If your intent is to use your vacation property primarily for personal use, it will not qualify for a 1031 exchange. You have to have the intent to use it as a business, and then be able to prove that you have done so. In 2008, the IRS added the safe harbor rules to the tax code, which claim that the IRS “will not challenge whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment” so long as the provision has been adhered to.
To ensure that you’ve adhered to the provision, you must own the unit for at least 24 months immediately before the 1031 exchange. Within each of those 12-month periods, you must rent the property to another person for 14 days or more, and your personal use of the property cannot exceed 14 days, or 10 percent of the number of days during the 12 months that the property was rented.
Now, there are exceptions to these rules, but this is where things get more complex. For example, if you allow family or friends to stay at the property without charging them, the property may still qualify for a 1031 exchange, but it may not. Many other factors play a part in determining its eligibility. Similar examples include if you stay at the property for more than 10 percent of the time you rented the property out, but are conducting repairs or renovations on it during that time, or if you don’t rent the property out, but rather hold it for the sake of appreciation.
If you’ve got a vacation property that you’d like to exchange using a 1031 exchange, give our team at DIS a call! We’ve got a group of professionals who can help answer your questions and determine your 1031 exchange eligibility. If you haven’t yet bought a vacation property, but would like to buy it while adhering to the provisions that will one day allow it to be exchanged, we can help you with that as well.
We’re here to answer any of your questions about 1031 exchanges and real estate investing. Give us a call anytime, we’d love to help you out!