Can You 1031 Exchange a Second Home in 2023?

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Many real estate investors have second homes that they use for vacation or infrequent living. From beautiful chateaus on the beach to scenic mountain retreats, investment property in desirable areas can often incur large capital gains taxes upon sale. Fortunately, there may be ways around this.

If you have an investment property as a second home that you’re thinking about selling, contact the 1031 specialists and tax advisors of NNN Deal Finder as soon as you can. Using a deep network of owners, developers, and brokers, these consummate specialists can help you to defer capital gains under IRS Section 1031.

There are Multiple Ways a Second Home Qualifies for a 1031 Exchange

Want to acquire a new rental property by swapping a property you’ve held for both personal usage and investment purposes? Was the property held for productive use and trade or business?

There are various ways property owners can utilize the 1031 exchange for a real property held with investment intent. If you’re unsure if you can exchange vacation and second homes as relinquished property in a 1031 tax-deferred exchange, consult an expert tax advisor.

By analyzing stable, long-term NNN Lease investments daily, a qualified professional can help any investor navigate the 1031 exchange. Need help selling your relinquished property and finding a replacement property for predictable cash flow? Want to explore lucrative on-market and off-market investment properties?

1031 Exchanges for Vacation Rentals, Second Homes & Investment Property

Before considering any properties for a tax-deferred exchange treatment, make sure you understand some basic rules.

Firstly, for vacation homes to qualify they must be real property and like-kind to the identified replacement property. This means they all must be held and/or intended for investment purposes. Moreover, they must be located in the same country.

If vacation properties are solely held for personal use or personal enjoyment, they will not qualify for a 1031 exchange. A vacation property that is a vacation rental may be different. It all depends on the type of vacation home rental property and how the deferred exchange regulations apply.

As initially outlined in the Private Letter Ruling 1981-03117, an investor can generally exchange a vacation property for another property, provided business status and intent.

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Since the Private Letter Ruling, the Inspector General and Department of the Treasury issued various reports and regulations on tax deferred treatment for capital gains and depreciation recapture.

How The IRS & Tax Court View ‘Intent’ In a Tax Deferred Exchange

According to Tax Court Memorandum 2007-134, the primary intent of the investor is the deciding variable in whether a vacation home property was held for personal use and personal enjoyment, or business and investment purposes.

As this tax court memorandum clarifies, what ultimately matters is the investor’s primary intent when the property is sold, and not when it is acquired.

Under Internal Revenue Service (IRS) guidelines, “safe harbor language” clarifies if vacation and second homes, or a primary residence converted into an investment property, qualify for tax-deferred exchange treatment in a 1031 exchange.

These safe harbor guidelines apply to both a sold and purchased vacation home or converted primary residence. As always, an investor should consult with legal and tax advisors about any vacation home or primary home.

Selling Vacation Homes as Investment Properties Through a 1031 Exchange

Under the Internal Revenue Service (IRS), Revenue Procedure 2008-16 details various tax-deferred exchange regulations for a 1031 exchange. These safe harbor guidelines permit a like-kind exchange of a vacation property or a second home. 

Although Revenue Procedure 2008-16 clarifies the safe harbor language relevant to such 1031 exchanges, investors may still be able to use 1031 exchanges outside that language.

How to Use a 1031 Exchange to ‘Swap’ a Second Home or Vacation Rental 

In order to meet the conditions for a tax-deferred exchange, your vacation rental, vacation property, or second home must: 

  • Be owned and maintained for two years or greater leading up to the 1031 exchange. This is called the “qualifying use period.”
  • Be rented at rental rates that are “fair market” for two weeks or greater (14 days) during both of the previous two years.
  • Be restricted in its personal use and personal enjoyment to two weeks or less, or to ten percent of the total days it was rented out to tenants during the period.

These conditions and requirements can get complicated, so be sure you track any personal use and trade or business use of the investment property. 

If you have investment properties to use in a trade, contact a 1031 exchange expert immediately.

Purchasing Vacation Homes or Second Home Real Estate Through a 1031 Exchange

If you’d like to purchase a vacation property, future vacation home, or second home as replacement property, you again need to follow Revenue Procedure 2008-16. The safe harbor guidelines of Revenue Procedure 2008-16 ensure taxpayer compliance and investment intent.

As an investor limited by rules on personal use, rent regulations, and tax-deferred exchange treatment, you should be mindful of these laws.

1031 Exchange Rules on Purchasing a Second Home, Vacation Home, or Replacement Property

Again, all the following safe harbor guidelines apply to the fair market value, personal use, and rent status of any replacement property.

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  • The subject property is owned and held for at least 24 months of the qualifying use period immediately preceding the 1031 exchange.
  • The subject property has been rented at fair market rental rates to tenants for at least 14 days during both of the previous two years.
  • The investor purchasing the second home, vacation home, or dwelling unit limits his or her personal use of the property to 14 days or fewer during both of the two years that follow, or to ten percent of the total number of days the property is rented out during that period.

If you’re unsure about any tax requirements, real estate qualifications, fair market values, or rent criteria, or have investment properties you wish to use in a trade, contact a tax advisor or specialist in 1031 exchanges today.

How to Use a Primary Residence in a 1031 Exchange

Although you cannot be living in your primary place at the time, you can enter a primary dwelling into a 1031 exchange. There are various ways this principal residence or dwelling unit qualifies. Just make sure neither you nor your family members are living in the property (including ‘family members’ such as an ex-spouse).

That said, if family members pay rent to the investor while using the property as their main residence, this is considered business use, not personal use.

Under Section 121, a residence receiving personal use can be used in 1031 exchanges if:

  • The investor owned the property for at least five years.
  • The investor lived in the property for two of those five years.
  • The property was rented out as a fair market rental for business.
  • The investor lived elsewhere while the property was a fair market rental.

You can always move from one residence to another while the first functions as a fair market rental for business. Just make sure you keep the IRS abreast of any changes. Remember, you’re only allowed one primary dwelling.

Furthermore, you can always convert a fair market value rental into a primary residence and conduct a 1031 exchange.

The use of the subject property will not be considered “personal use” by the investor if the family members pay fair market rental rates to the investor and the subject property is their primary residence.

Consult a 1031 expert about such circumstances today.

Whatever you do, don’t miss out on great investment opportunities because of convoluted tax laws and legalese. Build your robust, predictable rent income streams with amazing NNN properties.



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