My Airbnb is a 2nd home, can I do a 1031 exchange with it?

Question

I bought a property in Seattle and closed in January. Furnished and listed and started renting it out on Airbnb in March of this year. I have been booked pretty much ever since. Then received a letter from the HOA stating that I could not do short term rentals. I was bamboozled by the listing agent after she stated several times that I could use this property as an AIRBNB and used it as a selling point. Now I am getting notices from my HOA and thinking about strategies.

I am thinking about selling this property and taking the equity and parlaying it into a 8+ unit multi family property. My question is can I do a 1031 exchange with this 2nd home? I have pretty much been using it as a rental ever since I got it minus the 2 months that it too me to furnish and list the place on Airbnb.

Any suggestions? Thank you in advnace.

Bill Exeter · Answer

Hi @Tommy Quach,

It seems clear that you have the intent to acquire this property, rehab the property and then hold for rental or investment purposes, so it should qualify for 1031 Exchange treatment. There are those advisors that will tell you that you have not held the property long enough in order to qualify for 1031 Exchange treatment. However, I think it is clear that you did in fact have the intent to buy, rehab and hold for investment purposes, but you were misled to believe that you could rent the property out. So, you can sell the property and structure a 1031 Exchange transaction at this point in time because you did have the intent to hold for investment purposes but there is a business reason that requires you to sell early.

Dave Foster · Answer

@Tommy Quach, first you've got to hold the agent accountable for their careless and harmful assurances to you.

Secondly, stop calling it your second home - seriously :)

A second home does not qualify for 1031 treatment because you do not own it with the intent to hold for productive use.

But everything you're telling us says that you are holding that property for productive use. Your motivation was to rent it and make money. You would not be selling except that your desired method of productive use is no longer available.

I would venture to say that what you own is not a second home. You own a short term rental investment property that you may use some also for personal use.

That would qualify for 1031 treatment and as long as you and your accountant felt that you could demonstrate that you purchased it with the intent to hold for productive use then 1031 away!

My Airbnb is a 2nd home, can I do a 1031 exchange with it?

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