Can a 1031 Exchange Be Used for a Second Home?

Published July 20, 2023

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Real estate investors use a 1031 exchange to swap investment properties while deferring capital gains taxes. However, circumstances change, and you might have thoughts about your real estate properties that go beyond investments.Can you use a 1031 exchange to purchase a second home? Can you use it to sell your home?Great questions—we have answers.Below, we'll walk you through using a 1031 exchange on a second home and how to navigate the tricky IRS rules and stipulations to protect your tax-deferred status.Remember to always consult a tax and legal professional before attempting a 1031 exchange. These investment strategies are notoriously difficult and shouldn't be attempted without prior experience and know-how.

Can a 1031 Exchange Be Used for a Second Home?

Yes and no.It depends on your intention and how you follow the IRS's rules. It also depends on whether you're trying to sell your second home or purchase one—because that'll change the limitations and steps you need to take.First, let's discuss using a 1031 exchange to sell your second home. After that, we'll talk about using a 1031 exchange to purchase a second home.

Using a 1031 Exchange to Sell Your Second Home

Have a vacation home or second property that you want to swap? You could qualify for a 1031 exchange if you meet the IRS's regulations.

Investment property: First, you can only 1031 exchange your home if you've been using it as an investment property. It's not enough to just buy a property and claim you're holding it for appreciation—the IRS wants to see you've been using it as a rental property to generate income.
Property usage: You must have rented out the property at fair market value for at least 14 days in two 12-month periods during your time of ownership. You also can't have stayed in the property for 14 or more days or 10% of the number of days it was rented during a 12-month period.

If you meet these rules, you can potentially use a 1031 exchange to swap your second home for another like-kind property. Under the IRS's definition, your property isn't a second home—it's an investment property now.If your property doesn't meet the IRS's definition of an investment property, you're not out of luck yet. Limit your usage of the property moving forward and begin renting it out for at least 2 weeks every year. After you've claimed rental income on 2 consecutive tax returns, you'll likely qualify for a 1031 exchange.

Using a 1031 Exchange to Purchase a Second Home

A 1031 exchange is to swap an investment property for an investment property—it's not meant to be used on vacation homes or your primary residence.However, intentions change, and down the road you might decide to convert your rental property into a primary residence. If that's the case, you can take steps to make the conversion and protect your tax-deferment status.Follow the IRS's rules (that we mentioned above) for 24 months—after which you can convert your replacement property into a primary residence or personal vacation home.

Grow Your Real Estate Investment Without Being a Landlord

1031 exchanges can help you defer capital gains tax, but they won't help you avoid the hassles of traditional property ownership. Flock can, though.Exchange your rental property for shares in our portfolio of homes to get regular income and upside potential—all while deferring your taxes. We take over marketing, renting, repairs, maintenance, tenants, and everything else that goes along with property management. You sit back, relax, and watch your long-term wealth grow.Want to learn more? Visit our home page and chat with a member of the Flock team.

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