When we moved our family, the transition of the majority of our real estate holdings by the new place was done with almost no capital gains tax payments through the use of 1031 exchanges. The exchange we favored the most was buying a Florida vacation property. Absentee ownership with short-term rentals definitely includes obstacles, but nothing else we’ve invested in has been this fun and generated such happy memories. What’s the best way to know when your vacation property has permission to use a 1031 exchange?

The tax code for a 1031 exchange states:
“No loss or gain will get recorded on trades of real estate used for production means with a business or investments. When this kind of estate is traded for a comparable property, the same will occur if it’s owned for investment or production purposes.”

What are Your Intentions?

As you’re figuring out if your vacation estate is qualified to use a 1031 exchange, keep in mind the purpose of the real property. The IRS explains how real estate that doesn’t meet the requirements for the 1031 exchange also includes property used for personal reasons. When the property qualifies, it has to be one used simply for trade, investment for business ends.

The rules are quite specific as to what your intentions include if you’re looking at your operations. The trial of Moore v. Commissioner of Internal Tax Revenue in 2007 showed that Moore contended that he owned his vacation lodge entirely for investment uses. This was an insufficient argument to establish the claim. Moore went to his home regularly to dwell, so his real estate wasn’t eligible for the exchange due to how he used it for primarily personal objectives.

Considering Safe Harbor

Laws concerning Safe Harbor offers many points to clear up any of your 1031 exchange qualification questions regarding vacation properties. The IRS appended the rules initially to the tax code in 2008. As long as the rule is followed, the IRS “won’t question if the construction is entitled to be categorized as productive use when it comes to § 1031 of the Internal Revenue Code.”

The measures aren’t intended as normative and mandatory. Their role is more of a suggestion solely for the decorative fact set explained in the code.