I am currently in the process of selling a property and will be re-investing the proceeds. I will buy another local property but am considering using some of the funds to buy a vacation rental as well. I would use the property for family vacations but list with an online service for short term rentals to offset the cost. Is there a problem using a 1031 for this type of property? Any problem with using the property myself when it's not booked?
It is absolutely permissible to do a 1031 exchange for a vacation rental. As a matter of fact the IRS issued a safe harbor rev proc 2008-16 for vacation rentals. The gist of the safe harbor is that the IRS will not challenge an exchange in which the property has been held for 2 years and rented at least 14 days a year at fair market rent.
What this doesn't mean that is that you can't do an exchange on a vacation rental if you don't meet these two criteria. Only that you fall outside the safe harbor and it may be reviewed.
Where people get into trouble is when they inappropriately account for income, expenses, take depreciation where the use has been too great etc. Treat the property as a business for tax purposes. Rent it to make yourself a little money and enjoy it a little - all tax-deferred courtesy of your 1031 exchange.
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