1031 exchange (Can we turn long term rental into short term)

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1031 exchange (Can we turn long term rental into short term)

Keith Gilad
Member since 2021 · 1 post · 3 votes

Hello, I recently sold our long term rental property in Los Angeles and then purchased another property in North Carolina through a 1031 exchange. Am i able to turn the new property into an Airbnb/VRBO without being penalized? After the closing we rented the property for about 7 months, now we want to explore short term vacation rental options but still want to follow all the rules within the exchange. Is this possible and are there any rules we need to be aware of?

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y

@Keith Gilad, A resounding "no problem" from all!  If you were looking to immediately sell or use it extensively for personal use, or if you wanted to convert it to your primary residence you'd want to be careful of some things.  But as long as you're using it investment it's not going to impact your 1031 at all.

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  • Nathan Grabau
    Realtor · Longmont, CO · Member since 2021 · 577 posts · 631 votes
    3y

    This should not be an issue. I would contact the company that handled the 1031 for you to confirm this is the case. 

    1Reply
  • Nathan A.
    New to Real Estate · Sunnyvale CA and Maplewood, NJ · Member since 2022 · 257 posts · 161 votes
    3y
    I believe that should be OK from the 1031 perspective. "One of the benefits of the like-kind requirement as it relates to real estate is that all real estate is like-kind to other real estate." (source).
    1Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    3y

    Shouldn't be an issue. You just have to worry about another 1031 or paying the deffered taxes when you sell this property.

    1Reply
  • Alex Olson
    Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes
    3y

    @Keith Gilad You are fine. 1031 exchange allows you to exchange in to any kind of real estate. From farm land into apartments or house to farm land. Any kind of real estate in any state. Good job on completing a 1031 exchange. It is an amazing wealth building tool!

    2Reply
  • Trish Mccoy
    Real Estate Agent · Grass Valley, CA · Member since 2017 · 185 posts · 198 votes
    3y

    Yes, it is still a rental.    It makes no difference if it's short or long term.  

    2Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    3y

    @Keith Gilad, A resounding "no problem" from all!  If you were looking to immediately sell or use it extensively for personal use, or if you wanted to convert it to your primary residence you'd want to be careful of some things.  But as long as you're using it investment it's not going to impact your 1031 at all.

    The 1031 Investor5137 Reviews
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  • Grayson Spittel
    Rental Property Investor · Wake Forest, NC · Member since 2017 · 128 posts · 131 votes
    3y

    @Keith Gilad where are you looking to STR in NC? I'm here and have STRs in state. Happy to help with anything. Currently going through a 1031 myself to purchase another one.

    0Reply
  • Brooklyn McCarty
    Investor · Member since 2022 · 1k+ posts · 754 votes
    3y

    Shouldn’t be a problem at all! 

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    3y
    Quote from @Keith Gilad:

    Hello, I recently sold our long term rental property in Los Angeles and then purchased another property in North Carolina through a 1031 exchange. Am i able to turn the new property into an Airbnb/VRBO without being penalized? After the closing we rented the property for about 7 months, now we want to explore short term vacation rental options but still want to follow all the rules within the exchange. Is this possible and are there any rules we need to be aware of?


    The investment property doesn't have to be the same type of investment. I've used an exchange from a long-term rental to purchase a vacation rental and I sold another long-term rental to purchase a commercial property.

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  • Bonnie Griffin KaakePro Member
    Real Estate Consultant · Denver, CO · Member since 2021 · 666 posts · 389 votes
    3y
    Quote from @Keith Gilad:

    Hello, I recently sold our long term rental property in Los Angeles and then purchased another property in North Carolina through a 1031 exchange. Am i able to turn the new property into an Airbnb/VRBO without being penalized? After the closing we rented the property for about 7 months, now we want to explore short term vacation rental options but still want to follow all the rules within the exchange. Is this possible and are there any rules we need to be aware of?

    Keith, A 1031 exchange is not the problem it once was. You can exchange into quite different properties now. Your challenge is going to be going from long term rental on a property you own to short-term or vice versa. You will need an IRS Change of Accounting Form 3115. A long-term residential rental is depreciated over 27.5 years whereas a short-term rental must be depreciated over 39 years. CPAs/tax professionals strongly dislike doing these forms. My corporate team and I provide these as part of our cost segregation studies when they are needed. BTW, they are needed for cost segregation studies done on properties that have had at least one tax filing as well. Let me know if you have additional questions or I can be of help.
    [email protected]303-475-4459
    1Reply
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    3y

    @Keith Gilad I would definitely listen to @Dave Foster about doing 1031 Transfers.  He helped me do two of them last year.  I am surprised about the information of @Bonnie Griffin Kaake.  I did a 1031 transfer from selliong a rental property and bought 3 commercial properties which I turned one into a vacation rental.  I can see my accountants headache coming from  here

    2Reply
  • Leora Merrell
    Rental Property Investor · Member since 2019 · 276 posts · 235 votes
    3y

    I did this four times (2 LTRs into 4 STRs) in 2020-2021 and it was great. Highly recommend @Dave Foster and his team. Super easily done if you stick within the timeframe allowed by law. 

    1Reply
  • Bonnie Griffin KaakePro Member
    Real Estate Consultant · Denver, CO · Member since 2021 · 666 posts · 389 votes
    3y

    @Jerry W.  Are you aware that you can likely do a cost segregation study on those 1031 properties as well? And, you may have been able to expense some of the improvements that were capitalized in the past on your relinquished properties. If I can help you or your CPA/tax professional, let me know. 

    [email protected]303-475-4459
    1Reply
  • Levi BennettPro Member
    Real Estate Broker · Charlotte, NC · Member since 2014 · 285 posts · 248 votes
    3y

    I helped clients with 4 LTRs into STRs with 1031 in 2022. Since STR's is all we do, let me know if we can help. We utilize a suite of paid software to qualify/disqualify properties and help with consulting, contractors, and underwriting.

    0Reply
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