On Having Yourself a 1031 Vacation

Vacation homes are wonderful places to go to when you need a brief respite from the rat race. However, you may be considering selling it at some point in the future and using the proceeds to buy a second place – with the danger of incurring high taxes. If you can't handle that possibility, the Internal Revenue Service allows swaps under Section 1031 safe harbor rules, but only for pitfalls as far as the relinquished and replacement properties are considered.

For the relinquished property, the IRS states that you should have owned it at least two years before the exchange. At the same time, during each pre-exchange year, you must have rented out the place for at least two weeks. You cannot use the house for up to two weeks or the equivalent of ten percent of the rental days at market rates.

On the replacement property, you will have to own the property for at least two years after the exchange. For each of those two years, you can rent it out for a maximum of two weeks, plus your personal usage should be limited to anywhere close to two weeks.

A section 1031 exchange on a vacation home can help you save some taxes in the long run. You should take note, that full-time personal use is prohibited, but you can make money out of the place by renting it off.