To ensure a successful 1031 exchange, following the in-stone deadlines provided by the IRS is essential. These deadlines include the 45-day identification period and the 180-day exchange period.
But there’s another potential deadline involved with the like-kind exchanges. This is known as the 14-day rule. This rule mainly applies to secondary residences like vacation homes or second dwellings. But, that property is subject to very stringent conditions under 1031 exchange regulations.
Before continuing, let’s determine whether a vacation or second home is eligible for a 1031 exchange. Under normal circumstances, “like-kind exchange” and “vacation/second home sale” might be mutually exclusive. The reason is that, in most cases, that second home doesn’t fit the definition of a real estate asset “held for productive use in a trade or business, or for investment.”
But what if you rent the vacation home out to someone else instead of using it yourself? This is where a 1031 exchange could work as part of the IRS’ Safe Harbor Law. This law tells the IRS that the vacation home (or second home) is held for its rental income rather than personal use.
There are two versions of a 14-day rule when thinking about a 1031 exchange:
- You must rent that vacation home to someone else, at fair market value, for at least 14 days in a given calendar year.
- You must not use that residence for more than 14 days in a calendar year, or 10% of the days during which you might be renting that property to someone else.
The above can let the IRS know that the vacation home in question could be considered an asset used for investment rather than a primary residence.
Whether you’re swapping a property used for investment purposes or are considering selling your second home, the 1031 exchange comes with multiple regulations and many deadlines. When it comes to the 14-day rule or any other rule involved with the like-kind exchange process, be sure to work with a professional advisor.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
