Some investors own more than a single property and would later like to buy more. Someone looking into the option of using a 1031 exchange for second homes can find good information on this page and when viewing the video here. It is possible to benefit as a second home owner when using an exchange to offset taxes or use the funds to buy another house.
Safe Harbor Rule for Vacation Homes
A lot of investors own a home for use as a vacation property. These homes are usually rented out for most of the year to short stay visitors. Under a 1031 exchange, a safe harbor provision does exist that can help determine if a home is qualified under current regulations. Homes that meet the following conditions might be qualified:
1. 24 Months Pass After Initial Purchase
2. Fair Market Rent is Collected
3. 14-Day or 10% Rule
The 24-Month Rule
For a home to be qualified, an investor must own the home for a minimum of 24 months. This period is used to help the IRS determine if a home is being used for investment purposes is is just a personal property. This period is known in the industry as the qualified use period. This prevents quick buying and selling of properties to take advantage of a 1031 in real estate.
Collection of Fair Market Rent
To be considered an investment property, homes must be rented at a minimum of 14 days or more in a fiscal taxation year. Most investors can easily meet this requirement for a vacation or rental home that is located in their home state or out of state. The property must have a history of being rented for 2 full years to a person who is not an immediate family member of the owner.
10% or 14-Day Rule
Time spent inside of a vacation or second home used as investment for personal purposes is closely scrutinized by the IRS. A set of rules were developed to determine the primary property owner usage throughout the year. Under a 1031 for second homes, a property owner must not exceed use of a property for personal reasons for more than 10% of the total days rented to a third party. He or she would also have to limit personal days to 14 or less if the 10% rule is not applied.
More Than One Exchange for Second Property
Someone who does not meet the safe harbor provision of a traditional 1031 could have other options. There are multiple exchange types that can be processed in some circumstances. The JWB company has a full-time staff who helps investors across the country buy identified homes in growing markets. There is a downloadable guide right on this page that can be a first step for investors with second homes interested in a 1031 exemption.
