Selling a Vacation home- 1031 exchange?

Question

Hey guys my wife and I recently decided to sell our condo in Destin Florida. Units in our building are selling for record prices and we don't make it down there as much as we would like. If/when it does sell are we going to take a big hit in taxes? Just seeking advice and ideas of what we should do.

Thanks!

Dave Foster · Answer

@Natalie Kolodij, Like everything there's a lot of fuzzy intent kind of thinking.  But some general observations.  It's far easier to claim 1031 applicability for a property that is reported on Schedule E rather than Schedule A of the tax return.

Rev Proc 2008-16 gives a safe harbor (which of course doesn't preclude any other scenarios) by saying a hold period of 2 years and rental of at least 14 days/year and personal use limited to 14 days or 10% of the amount of time rented for both relinquished and replacement properties.

Actual rental is valid but not required by statute.  Personal use is not prohibited but less is better.  Historically the "incremental increase in value" - IRS speak for appreciation has been a valid defense but in recent years appreciation motive alone has not been looked at as favorably by itself when they are examining vacation properties.

Leslie Pappas · Answer

Hi @Ben Shipley, if you're an accredited investor and you decide to 1031 exchange, you might consider reinvestment into DSTs. They are hands-off, institutional grade real estate investments, and they allow you the option to diversify. You can buy into institutional grade $50-125M projects with as little as $100,000. Professionals with decades of experience and very impressive track records do all the heavy lifting for you. You get potential cash flow, tax shelter and appreciation. Loans are non-recourse.

Natalie Kolodij · Answer

@Dave Foster Will be a great resource for this.

If it's just your 2nd home and wasn't an investment/rental property I don't believe it qualifies for a 1031 exchange.

You could make it a rental for 12-24 months first then it would qualify I believe.

Peter Mohylsky · Answer

1031 exchanges are good if you want to stay in the real estate market, exchanging property for like property.  I am not sure how long you have held the property.  One of my teammates is an accountant, hired specifically for this purpose, give me  shout and we can offer some options.

Natalie Kolodij · Answer

@Dave Foster

What situations could you sell a vacation home? Would it require some use as rental as well or how would you prove intent to hold as investment?

I'd love to hear a little more on this area :)

Dave Foster · Answer

@Ben Shipley, Many vacation condos are sold as 1031 exchanges.  How you have used it, your intent in holding it, and the documentation of it on your tax return are the keys.  If you decide to sell it under a 1031 exchange then  you are not restricted to vacation rental type property.  You may sell and purchase any other kind of investment real estate.  If you've treated that as an investment you'll have not only the hit on appreciation but also the recapture of depreciation unless you do the 1031.

So it is very worth looking into.

Selling a Vacation home- 1031 exchange?

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