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Investing in Real Estate

Can You 1031 Exchange Your Vacation Home or Second Home?

In my last three blogs of this four part series, we went over the Benefits of a 1031 Exchange - Part I, Different Types of 1031 Exchanges - Part II, and The Middleman to Complete a Successful Exchange - Part III

In this last segment, I would like to elaborate on a 1031 Exchange question I’m asked often, “Can I complete a 1031 Exchange with a vacation home or second home?”

And the short answer is yes.

Here’s what you need to know about exchanging mixed-use vacation home.

In 1981, the IRS issued a Private Letter Ruling (PLR) stating that you could 1031 Exchange out of a vacation rental and into another investment property if it was held as an investment as well as personal enjoyment. 

In 1991, the Department of Treasury issued the Deferred Exchange Regulations that went against the IRS's PLR. It stated that an Exchange must be held for investment only and not as a second home or vacation rental with the ability to use it for personal use. 

During this time, it was extremely confusing determining if a vacation rental or second home would qualify for a 1031 Exchange. 

Finally, in 2008, the IRS issued a Revenue Procedure clarifying the guidelines for qualifying a vacation rental or second home for a successful 1031 Exchange.

 

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1031 Exchange: Finding a Qualified Intermediary - Part III of IV

In my last two blogs, we went over the Benefits of a 1031 Exchange - Part I and Different Types of 1031 Exchanges - Part II. In this article, part three of our four part instalment, I would like to cover a little more information about the middleman of the 1031 Exchange.

To do a successful 1031 Exchange, you need to use a Qualified Intermediary (QI), also known as a Facilitator or an Exchange Accommodator. This isn’t an easy, do-it-yourself, sell one investment and buy another investment, expecting to defer capital gains tax-type transaction. You will need the intermediary to help legally facilitate the transaction and to adhere to the IRS tax law guidelines.

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1031 Exchange - Understanding How the Exchange Process Works - Part II of IV

In my last blog, we went over the benefits of a 1031 Exchange. So let’s go a little deeper into the different types of 1031 Exchanges available to investors. 

First things first, what are the basic requirements to qualify for a valid 1031 Exchange? 

Almost any property qualifies for a 1031 Exchange unless the property is your principal residence, it must be an investment property such as rental or commercial properties or vacant land. Investments must also be of "like-kind" investments, for example, you can’t exchange a business into a commercial building or a rental property into a principal residence (click here for the IRS explanation on like-kind exchanges).

1031 Exchange Graph Kengo Ueno

Here is the timeline for a Delayed Exchange.

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1031 Exchange - A Taxpayers Secret Weapon to Paying Less - Part I of IV

Are you thinking about changing up your real estate investments - looking for properties with better opportunity for appreciation or increased rental income potential, but you're worried about capital gains tax on the profits? Welcome to the world of the 1031 Exchange.

The Internal Revenue Code (IRC) 1031 Tax Deferred Exchange is a great way to sell your investment property and trade up to another investment property, tax deferred. And by investment property, we mean any property that’s not your principal residence or second home. Typically, it’s a rental that’s either residential, such as a house, townhome or condo, or commercial, like an office building, warehouse or strip mall or vacant land that’s either residential or commercial.

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