Ah, paradise…Sandy beaches, mystic mountains, desert vistas… Wherever your paradise is, why not buy a vacation home there using the proceeds from your 1031 exchange?
Do Vacation Homes Qualify for Like-Kind Exchanges?
Second Homes and Vacation Homes qualify as 1031 replacement property as long as you limit your personal usage to no more than two weeks per year, or 10% of the time the property is rented out each year (whichever is greater) during your first few years of ownership. There are also some affordances for time spent in the property while doing maintenance and improvements.
Buying your dream vacation home in a 1031 exchange is possible if it meets the IRS safe harbors. If you use the proceeds of your sale within an exchange to buy your vacation home, for the first 2 years you must rent the property at fair market value for at least 14 days each year. This can include Airbnb or renting to friends and family (as long as they pay fair market rent). In addition, your personal use of the property is limited to either 14 days each year or 10 percent of the number of days that you rent it out.
As an example, if you rent it for 200 days in a year, your personal use can be up to 20 days. After 2 years you do not have any more requirements. Enjoy your new vacation home!
Bottom Line: You can buy a second home / vacation home in your favorite vacation destination, earn rental income from it from renting it out as a short-term or long-term rental, AND use it personally!
Airbnb, Vacasa, and other Short Term Rental Exchanges
With the advent of the short-term rental platforms, companies like Airbnb, VRBO, and Vacasa can help Second Home / Vacation Home owners generate great returns from renting our their properties on a short-term basis (like hotel rooms). These companies can also help investors secure professional property management, so that your short-term rental property is completely hands-off. Last but not least, you can own a piece of property in your favorite vacation destination where you’ll personally be allowed to stay!
Plus, with the 1031 Exchange rules allowing owners to use the property part of the year, exchangers can have a cash-flowing, appreciating investment, AND a place to vacation once in a while.
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