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:
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.