When you sell an existing investment property, you’ll pay capital gains on any appreciation, as well as the depreciation recapture.
In 1031 exchanges, one income property is swapped for another and the gain transfers from the former property to the newer property, allowing your investment to grow tax
As an investment property owner, you can exchange for a vacation or future retirement home.
Requirements of a 1031 exchange
Here are seven primary 1031 exchange rules to keep in mind:
1. The investment property being sold and the property being acquired must be similar, or like-kind.
2. 1031 exchanges only apply to business or investment properties, not personal property.
3. The replacement property must be of equal or greater value.
4. For a tax-free exchange, you can’t receive “boot” which is cash or other property added to an exchange to make the value of traded goods equal. While partial exchanges of a newer, but lesser value property, are allowed, you will pay capital gains tax on the difference or “boot”.
5. The titleholders of both properties in the exchange must be identical.
6. After selling the property currently owned, you have 45 days to identify up to three potential like-kind replacement properties.
7. The replacement property must be received and exchanged within 180 days after your original property is sold.
There are currently no limits to how many times you can conduct a 1031 exchange. Even if subsequent swaps produce a profit, you can defer paying taxes until you sell for cash.
Only business or investment properties are eligible for a 1031 exchange, including vacant lots, apartment buildings, commercial properties, and even single-family residences you rent out to tenants.
A property you use solely for personal use, such as your primary residence, does not qualify.
Buying a vacation home with a 1031 exchange
You can invest the proceeds of a likekind exchange into a vacation rental home by meeting these requirements:
During the first two 12-month periods after the exchange:
• You must rent the property for 14 days or more per year.
• You must limit personal use to not more than 14 days per year and no more than 10% of the days rented.
Rental rates must be at fair market value. Renting it to a family member for $1 per night would count as personal use.
You can also sell your current vacation home through a 1031 exchange as long as the rent and occupancy requirements for the two years preceding the sale are
After meeting the requirements of the first two years of ownership, then you are free to stay as often as you’d like without further requirements.
Buying a retirement home with a 1031 exchange
The rules during the first two years of acquiring your future retirement home require that your personal usage not exceed 14 days, and the property is rented
for 10 times the number of personal use nights: at least 14 days per year.
Additional rules apply to converting a rental property acquired in a 1031 exchange to a primary residence.
Be sure to consult your attorney and tax advisor to determine if a 1031 is right for you.
Contact me to discuss a vacation or future retirement home investment with or without a 1031 exchange!
I’ll help you find an out of area REALTOR® as well!