A 1031 exchange is when capital gains taxes might be deferred when used to purchase a like-kind property used for business, trade, or an investment. However, there are a few situations when you might be able to relinquish or purchase a vacation home in a 1031 exchange.
If you have a vacation or secondary home that you plan to convert to an investment, it might also qualify in a 1031 exchange under certain circumstances.
In most cases, a property used for personal use would not qualify in a 1031 exchange. But, in 2011 the Safe Harbor Law changed the definition of what qualifies in a 1031 exchange and allowed some vacation homes to qualify. If a property meets the criteria to define a safe harbor property, the IRS might not “challenge whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment” in a 1031 exchange.
The key factor that distinguishes what vacation properties might qualify in an exchange is the percentage of time you occupy it for personal use.
For properties being relinquished in a 1031 exchange, the owner should:
Keep in mind that letting friends and relatives use the property counts as personal use unless they pay a rent comparable to the local fair market rents.
If you want to acquire a vacation home as a like-kind property in a 1031 exchange:
So, the answer to when a vacation home qualifies for a 1031 exchange varies. It is possible, but the exchange property must meet stringent personal use requirements.