In a previous article, Tax Advantages of Owning a Vacation Home, we described some tax advantages of your vacation home depending on if it is considered a personal residence or an investment property. This article is intended as an extension on the previous article to describe how to sell your vacation home and defer any taxes using a 1031 exchange. If you are not familiar with 1031 exchanges, please read our article, Avoid Capital Gains Tax By Exchanging Real Estate with 1031 Exchanges - Houston Small Business CPA.
First, Can I Use a 1031 Exchange When Selling My Vacation Home?
That depends on if your vacation home is considered a personal residence or rental property. For the property to qualify for a 1031 Exchange the property must have been used in a trade or business or held for investment and that the property to be acquired must also held for one of these purposes.
So, now you need to determine if your second home is a personal residence or an investment property. To do so, you need to answer two questions - how often is the home rented out and how often do you use the home?
Investment Property
Your second home will be considered an investment property if you do not use it often. For example, if you rent your home for more than 14 days a year and your personal use is less than 10% of the time it is rented out - then you have an investment property - this situation would qualify.
Personal Residence
Homes that are rented more than 14 days a year and have personal use of more than 14 days or 10% of the rental days (whichever is greater) can be considered a personal residence. Personal use includes use by family members and anyone else who pays less than market rental rates - this situation would not qualify for a 1031 exchange. If you are deducting the real estate taxes and interest on the mortgage loan of your vacation home on schedule A of Form 1040, your property is a personal residence.
However, you're not out of luck but you will need some patience....
Convert your Personal Residence Vacation Home into an Investment Property
The easiest way to convert your vacation home into an investment property is to not use the property for at least a year before you sell it or rent it out at fair market value for one year.
The tax rules for a vacation home are complex. If you are considering selling your vacation home, call us so we can help you take advantage of the tax laws so you can keep more of your hard earned money in your pocket. For more information about tax services Spring Tx browse our website!
