Convert a Vacation home to an Investment property for 1031

[Sandy Metivier]

We have our house in Lake Tahoe, California for 6 years for which in the past we've used a portion of the year as a vacation house (random weekend visits mostly, but a couple of summers we lived at the house), and had the house available on Airbnb for the rest of the year (majority). We are considering selling it in the near-ish future and want to know how we can defer capital gains tax by getting it to be classified as a rental/investment property so we can use a 1031 exchange?

Thanks in advance! 

[Nicholas Aiola]

@Sandy Metivier @Dave Foster

As Dave referred to, there are safe harbors outlined in Rev. Proc. 2008-16 - see Section 4.02(1) (bolded for emphasis):

(1) Relinquished property. A dwelling unit that a taxpayer intends to be relinquished property in a § 1031 exchange qualifies as property held for productive use in a trade or business or for investment if:

(a) The dwelling unit is owned by the taxpayer for at least 24 months immediately before the exchange (the “qualifying use period”); and

(b) Within the qualifying use period, in each of the two 12-month periods immediately preceding the exchange,

(i) The taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and

(ii) The period of the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental. For this purpose, the first 12-month period immediately preceding the exchange ends on the day before the exchange takes place (and begins 12 months prior to that day) and the second 12-month period ends on the day before the first 12-month period
begins (and begins 12 months prior to that day). 

It is also important to note the paragraph just before - Section 4.01 (bolded for emphasis):

.01 In general. The Service will not challenge whether a dwelling unit as defined in section 3.02 of this revenue procedure qualifies under § 1031 as property held for productive use in a trade or business or for investment if the qualifying use standards in section 4.02 of this revenue procedure are met for the dwelling unit.

It's important to keep in mind that "personal use" also includes family, friends, or anyone else who did not pay FMV rent to stay there; if they paid FMV rent, their stay(s) would not be considered personal use.