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1031 Exchanges for Vacation Homes

If you own a vacation home that is used as a rental as well as for your personal enjoyment, can you upgrade to another property without paying capital gains taxes? Yes, so long as you follow strict criteria to qualify for a 1031 vacation home exchange. In this guide, we draw on our expertise with 1031 vacation home exchanges to ensure the eligibility and compliance of your exchange. 
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Benefits of Using 1031 Exchange for Vacation Homes

One benefit of using a 1031 exchange for vacation homes is that it lets you diversify your real estate investment portfolio. Another is that you can upgrade to a more desirable property, without paying capital gains taxes. It can even let you use funds from the sale of your relinquished vacation home to make improvements on the new vacation home. But this type exchange has very specific requirements that must be met, in order for it to be successful. 

Eligibility Criteria for Vacation Homes

What Are the Rules for a 1031 Vacation Home Exchange?

In short, during the first two 12-month periods after the exchange, you must rent the property for more than 14 days throughout the year, and use it for personal use fewer than 14 days per year, and no more than 10% of the nights rented. If you meet these criteria, then you can invest the proceeds from a relinquished property into a like-kind replacement property.

Intent of the Investor

The primary intent of the investor to use the replacement property for investment purposes, at the time of the exchange, is the key factor in determining whether it is held for personal use or as an investment. Call us at 916-252-6900 for help determining and articulating your primary intent for the property. 

Only Dwelling Units Are Eligible

The IRS defines a dwelling unit as a piece of real property with a house, apartment, condominium, or other structure that furnishes basic living accommodations, including a sleeping area, bathroom, and cooking capabilities.

What Does and Does Not Count as Personal Use?

If you, your family members, or anyone else who has an ownership interest uses the property without paying fair market rent, that counts as personal use. If anyone pays fair market rental rates, it is not considered personal use, even if the property is their primary residence. 

 

Fair market rental rates are determined based on the circumstances that exist when the rental or lease agreement is signed. 

If You Are Working on the Vacation Home, Does It Count as a Personal Use Day?

If you are a DIY lover or fixer-upper with plans to make improvements to your vacation home, then any days you spend working on the property do not count toward the 14 day limit. In other words, you can stay at your new vacation home as much as you like, so long as you are doing work to improve its value.

What Happens After Two Years?

After two 12-month periods of restricting your use of the vacation home to 14 days, and renting it out to guests for 10 times as often as you stay there, you will have fulfilled the requirements and be free to stay there as much as you like. Note, however, that if you continue to rent it out to paying guests for at least 14 days each year, you may be eligible to write off rental expenses and so reduce taxes.

Potential Exceptions to the Rules

Your 1031 vacation home exchange may still qualify for deferral of capital gains taxes, even if you do not follow the guidelines. Call us at 916-252-6900 for a free consultation, to determine the specifics of your exchange, and help set a winning strategy.

Steps to Complete a Vacation Home 1031 Exchange

1

Contact 1031 Pros for advice on structuring your 1031 vacation home exchange.

2

Because Section 1031 does not allow you to own both properties at the same time, you will sell the relinquished property through a qualified intermediary and Exchange Accommodation Titleholder (or EAT), or in some cases acquire the replacement property first through a parking agreement.

3

As your qualified intermediary, we will set up a special purpose entity, often a single member limited liability company, that is used to acquire and park the title to your replacement property during the exchange.

4

We will work with you to ensure compliance with all IRS regulations, and successful completion of your exchange. 

5

At the end of the exchange, the replacement property and any construction loans will often be transferred to you through the holding entity, rather than by a deed. 

What Should I Look for in a Qualified Intermediary?

When selecting a qualified intermediary, be sure to choose one with experience in 1031 vacation home exchanges, as the rules and regulations for these are quite different from other 1031 exchanges. They should also have expertise in navigating the unique challenges of vacation home markets, and help you understand how 1031 exchanges can benefit your portfolio and your life. 

 

At 1031 Pros, we do all of this and more, including offering personalized consultations to align your vacation home investments with broader financial plans, access to real estate management services, and more. We also bring top tier customer service to the table – always answering your phone calls, at any time day or night, and replying to emails within 24 hours.

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Financial Considerations and Planning

We are committed to helping you plan wisely for your exchange, so you make the most of your investment. Vacation home 1031 exchanges have very specific criteria and can be more time consuming than other exchanges. For example, if you are making improvements to your replacement property, be sure that your financing is secured before starting the exchange. Also, be sure that your budget includes room for expenses such as transaction and legal fees. As 1031 vacation home exchange experts, we are here to help guide you through the entire process.

Selecting the Right Vacation Home

Of course, your new vacation home should be a place that brings you delight and joy. But there are other factors to take into consideration. Before entering any real estate transaction, closely examine the economic stability of the area where your replacement property is located. Ideally,  you will find a property in a strong market, as well as one that allows significant value-add through improvements, or even one that is under market value with high upside potential. It’s important to understand market trends and future growth potential, and we’ll work with you to help make sure that you select the right replacement property. 

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Legal and Tax Expertise

1031 vacation home exchanges must conform to IRS guidelines and laws at the state and local level, and must also be compliant with the rules specific to 1031 exchanges. At 1031 Pros, we are expert professionals who specialize in real estate and tax considerations, so we can help you mitigate risk and maximize the reward you get from your vacation home. 

Real Customers, Real Stories

“Honestly, you have been great!! I will forever recommend you to all my clients. Thank you for your prompt responses and being on top of everything. Thank you all for working so hard to get this done. I just wanted to tell you all I appreciate it.”


– Ana Torres

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Whether you're ready to sell today or in the future, we are happy to answer any questions you may have about your real estate portfolio.

 

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  • What type of property qualifies for a 1031 exchange?
    Any property held for productive use in a trade or business or for investment can be exchange for like-kind property. "Like-kind" refers to the nature of the investment. Any type of real property can be exchanged for another type of real property. For example: A single family rental can be exchanged for a duplex. Raw land can be exchanged for a shopping center or an office space for apartments. Any combination will work. This gives the investor flexibility to change investment strategies to fulfill their portfolio needs.
  • What Does Not Qualify?
    A personal residence, developed lots, home flipping, partnership interests or property held for resale immediately after acquisition. Second homes may or may not qualify depending upon the use and how it's reported for income tax purposes.
  • What kind of exchanges does 1031 pros handle?
    We handle all types of exchanges: Delayed Exchanges, Reverse Exchanges and Build to Suit Exchanges. From the simple to the complex, we can handle any type of exchange.
  • Does 1031 Pros handle exchanges in any state?
    Yes. We can handle exchanges for any property in any of the 50 states.
  • How much notice do I need to do a 1031 Exchange?
    You can do a 1031 exchange any time before closing on the sale of your investment property. Like we said before, we're fast.
  • How long do I need to own my investment property before I can exchange it for another?
    There is no set timeline, but to avoid any issues you should at least own it for a minimum of 12 months.
  • What happens if I don't close on my replacement property within 180 days?
    Then you just pay the capital gain taxes like your would have if you were to sell the property in the first place.
  • Can I sell one property and exchange into multiple properties?
    Yes, in most cases you can exchange into three other properties.
  • Why should I use a qualified 1031 intermediary to do my exchange?
    We will prepare all the correct paperwork you will need to file your taxes with. We will also ensure you meet your timelines and any other specifics of the 1031 tax code.
  • What if my Title company is a qualified 1031 intermediary?
    1031 Pros specializes in exchanges and has the expertise, experience and history to ensure an audit free exchange.
  • What is a reverse exchange?
    A reverse exchange is when you close on the purchase of the replacement property before you close on the sale of the relinquished property. Many real estate investors will utilize a reverse exchange to acquire a replacement property in a market where there may be competing offers or there is a need to close fast. Because of our vast experience handling these types of exchanges, we offer very competitive rates and are willing to match any competitor pricing.
  • What is an improvement exchange?
    Also referred to as a construction exchange or build-to-suit exchange, improvement exchanges offer real estate investors nice benefits, which often result in better investment opportunities than properties readily available on the market. The ability to remodel, add capital improvements, or build from the ground up, while using tax-deferred dollars, allows an investor to reinvest in a replacement property that meets their exact investment criteria.
  • What is the Federation of Exchange Accommodators?
    The Federation of Exchange Accommodators (FEA) is the only national trade association organized to represent professionals who conduct like-kind exchanges under Internal Revenue Code §1031. Members include Qualified Intermediaries (QIs), their primary tax and legal counsel, and affiliated industries (TIC sponsors, banks, real estate brokers, title companies, settlement/escrow agents, etc.). 1031 Pros is a proud member of the FEA.
  • Can I 1031 exchange into a Tenancy in Common or Triple Net Lease Property?
    Yes, you can exchange into a Tenant In Common (TIC) or Triple Net Lease real estate investments. The biggest rule of thumb is that your name is on the title as an owner with a percentage of ownership. These types of real estate investments offer a great passive income for those who are done with being a landlord and are ready to sit back and collect a monthly check. We do not offer these types of investments at 1031 Pros, but we have some great partners who do. Call us today to learn more.
  • Does my personal residence qualify for a 1031 exchange?
    No, it does not. Personal residences qualify for different tax benefits under IRS Code Section 121. Section 121 allows a taxpayer to exclude up to $250,000 ($500,000 for certain taxpayers who file a joint return) of the gain from the sale (or exchange) of property owned and used as a principal residence for at least two of the five years before the sale. 1031 Pros does not offer any services or tax advice for personal residences. Please contact our trusted Accounting partners under the "More Tab" for more information on Section 121. Tell them 1031 Pros sent you!
  • Are my funds insured?
    Each of our exchanges uses a unique, individual, FDIC insured account. 1031 Pros also has additional bonding and insurance, so your funds are always safe and secure.

Have More Questions? Send Us a Message.

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