Can A Vacation Home Qualify For A 1031 Exchange?

One of the trickiest and most confusing areas of a 1031 exchange often involve investors who wish to sell and replace vacation home property. Generally speaking, primary residences (and second-homes) do not qualify for an exchange. However, the IRS does permit some vacation homes to qualify for 1031 exchanges, subject to stringent rules.

Relinquished Property

1. The holding period for the vacation home is at least 24 months immediately before the exchange*;
2. For each of the two-12-month periods, the vacation home is rented to another person at a fair rental for 14 days or more; and
3. The homeowner limits his use of the vacation home to not more than 14 days or 10% of the number of days during the 12-month period that the vacation home is rented at a fair rental value.

*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).

Replacement Property

1. The holding period following the exchange is at least 24 months*;
2. For each of the two-12-month periods, the vacation home is rented to another person at a fair rental for 14 days or more; and
3. The homeowner limits his use of the vacation home to not more than 14 days or 10% of the number of days during the 12-month period that the vacation home is rented at a fair rental value.

*The first 12-month period immediately after the exchange begins on the day after the exchange takes place and the second 12-month period begins on the day after the first 12-month period ends.

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