Farm to Vacation Rental

[Andrea Smith]

Can I use a 1031 exchange proceeds to buy a vacation rental in Hawaii?

Thanks,

Andrea

[Dave Foster]

@Andrea Smith, You sure can.  Any type of investment real estate can be exchanged for any other type of real estate and anywhere in the 50 states and a couple of US territories.  So a 1031 from a farm to a Hawaii vacation rental would be perfect.

Make sure that if you live on that farm you split your sale up so that only the farmland goes into the 1031 exchange.  The portion of the land and house that you lived in could be tax free using the primary residence exemption.

The limitation listed above that you cannot have more than 14 days of personal use or 10% of the number of days actually rented for the property to qualify for a 1031 exchange is part of a safe harbor from the IRS that originally was aimed at taking depreciation and expenses against income.  What is important is your intent to use it for investment and how you demonstrate that intent.

One easy way to demonstrate that intent is also given in that same safe harbor statute - days that you stay in the property while working on it do not count.  Take a paintbrush with you and fix up a room at a time.  And you'll have plenty of time to enjoy the beach.

Another tip is to limit the blackout dates on your rental calendar.  Use last-minute openings and cancellations for yourselves.  You can demonstrate efforts to rent the property full time.