--- title: Tax Treatment of Vacation Homes - 1031 Exchanges and Other Tax Aspects description: Choosing the right DST for your needs can be a bit complex. When reviewing your options, it’s helpful to consult with a professional. 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[![Register](https://no-cache.hubspot.com/cta/default/5468919/d02a3ee4-7db2-4d64-b925-a6ebbfe26664.png)](https://cta-redirect.hubspot.com/cta/redirect/5468919/d02a3ee4-7db2-4d64-b925-a6ebbfe26664) ![blog-template-banner](https://blog.fgg1031.com/hs-fs/hubfs/Blog%20Banner/blog-template-banner.png?width=1920&name=blog-template-banner.png "blog-template-banner") # Blog ### Subscribe to Our Blog ### Subscribe to Email Updates ## Featured Post   [Paul Getty](https://blog.fgg1031.com/blog/author/paul-getty) ## [721 UPREIT Options in DST Programs (Part 3)](https://blog.fgg1031.com/blog/721-upreit-options-in-dst-programs) We have previously written two blog posts on 721 UPREIT options which discuss basic concepts which I encourage readers to review prior to reading this b\[...\] [Real Estate Investors](https://blog.fgg1031.com/blog/topic/real-estate-investors) [DST](https://blog.fgg1031.com/blog/topic/dst) [721 Exchange](https://blog.fgg1031.com/blog/topic/721-exchange) [UPREIT](https://blog.fgg1031.com/blog/topic/upreit) [Read More](https://blog.fgg1031.com/blog/721-upreit-options-in-dst-programs) ## Recent Posts [1031 Exchange](https://blog.fgg1031.com/blog/topic/1031-exchange) # Tax Treatment of Vacation Homes - 1031 Exchanges and Other Tax Aspects By [Paul Getty](https://blog.fgg1031.com/blog/author/paul-getty) We are pleased to share this guest blog provided to our readers by Weiming Ping, Division Manager with Asset Preservation. Asset Preservation, a subsidiary of Stewart Title Company, is a leading national 1031 Exchange qualified intermediary who has completed over 200,000 1031 exchanges nationwide, and is efficiently handling exchanges throughout the country.   #### **1031 Exchanges and Other Tax Aspects** Real estate in resort or vacation destinations can produce diverse and significant tax consequences. These tax consequences can be particularly critical at the time a property is sold, since many vacation destinations have appreciated significantly, and property owners may be facing significant capital gain tax consequences upon disposition. The use of a tax deferred exchange under [Internal Revenue Service Code (IRC) Section 1031](http://apiexchange.com/index_main.php?id=8&idz=210) can be particularly important in disposing of such property. This blog will first address the use of Section 1031 tax deferred exchanges in disposing of vacation properties. It will then consider the tax consequences of several different scenarios both while the property is owned and upon disposition of the property. Last, it concludes with a few words about converting a vacation property into an investment property eligible for Section 1031. #### **Qualifying for a 1031 Exchange** Internal Revenue Code Section 1031 may be available for vacation property owners seeking to defer capital gain taxes on the sale of a vacation-type property. The main issue, in most cases, is whether the properties sought to be exchanged are held “for the productive use in a trade or business or for investment,” or whether they are held exclusively for the personal use of the taxpayer. The starting point in addressing this issue is [Revenue Procedure 2008-16.](http://apiexchange.com/tax_and_legal_updates/rev_proc/rev_proc_2008-16.pdf) Rev. Proc. 2008-16 creates a “safe harbor” for exchanges of vacation property if specified ownership and use requirements are met. The property must include a sleeping space, bathroom, and cooking facilities (e.g., be a residential property). The property must further qualify as follows:  1. 1. Must be owned by the property owner for at least 24 months immediately prior to the exchange 2. Within each of the preceding 12-month periods prior to the exchange (a) the property owner must rent the property to another person or persons at a fair rental for 14 or more days; and (b) the property owner’s personal use of the dwelling unit must not exceed the greater of: 14 days, or 10% of the number of days the dwelling is rented out. #### **Non Qualifying Example** A 2007 Tax Court decision provides a good example of what will not qualify for a 1031 exchange of a vacation property. The property owners exchanged a lakefront vacation property for another lakefront property. The property owners argued that both properties were held for investment because of the potential for long-term appreciation, and thus qualified for tax deferral under Section 1031. However, the Court concluded that neither property was held primarily for investment purposes, but were instead held for their personal use and enjoyment. In reaching this conclusion, the Court considered that:  1. The property owners never rented or attempted to rent the property to others;  2. The property owners deducted mortgage interest as a “home mortgage interest” expense rather than investment interest expense; and  3. The property owners did not take (and probably did not qualify for) depreciation or other tax benefits associated with an investment property including deductions for maintenance expenses. #### **Does the Vacation Property Qualify for a 1031 Exchange?** There are several factors to consider in evaluating a possible 1031 exchange opportunity:  - Has the property been shown on one or more tax returns as an investment property or property used in a trade or business, including the characterization of mortgage interest as deductible investment interest expense or business expense?  - Are the property improvements eligible for depreciation?  - Is the property used substantially as a personal vacation property or second home? The characterization of residential property as held primarily for investment or for use in a trade or business is often unclear, and dependent upon the particular facts and circumstances. #### **Tax Treatment During Ownership: Different Scenarios** The following sections will consider a number of different fact patterns, and the tax consequences which may arise both while a vacation-type property is owned and upon disposition of the property. These four scenarios are described below. **VACATION HOME WITH NO RENTAL ACTIVITY** Tax Consequence during Ownership: A vacation home held strictly for personal use with no rental activity at all is considered a second home and does not qualify for the tax deferral benefits of a Section 1031 exchange. The mortgage interest and real estate taxes are tax deductions on Form 1040 Schedule A of the federal tax return. No other expenses, including repairs, maintenance, or insurance, are deductible. Tax Consequences at Disposition: The property owner may be able to take advantage of the exclusion from capital gain provided by [IRC Section 121](http://apiexchange.com/index_main.php?id=8&idz=255) if they can establish this home has been their primary residence for twenty four (24) of the past sixty (60) months. Section 1031 non-recognition treatment is not available because the property has been held solely for personal use. Keep in mind that when the property owner is splitting time between more than one residence, the IRS generally applies a couple of tests to determine which property is considered the “principal residence” for purposes of qualifying for capital gain tax exclusion under Section 121. First, qualification as a principal residence is determined by the facts and circumstances. The property which the owner uses the majority of the time during the year will typically be considered the principal residence. However, other factors may be used in determining which property is the principal residence, as set forth in Treasury Regulation 1.121-1(b)(2). The factors include, but are not limited to: - The time spent in a residence. - The taxpayer's place of employment. - The principal place of abode of the taxpayer's family members. - The address listed on the taxpayer's federal and state tax returns, driver's license, automobile registration, and voter registration card. - The taxpayer's mailing address for bills and correspondence. - The location of the taxpayer's banks; and - The location of religious organizations and recreational clubs with which the taxpayer is affiliated. Second, after it has been established which property is the “principal residence,” the IRS will generally try to determine if the property owner has actually occupied the residence enough days to meet the 24-month requirement.  VACATION HOME RENTED LESS THAN 15 DAYS A YEAR Tax Consequences during Ownership: If a second home/vacation home is rented less than 15 total days during the year, it is still considered a second residence. The property owner may exclude the rental income from their gross income regardless of the amount. The property owner will be able to deduct the mortgage interest and property taxes but they will not be able to deduct any of the other expenses associated with renting the home, such as any necessary repairs or maintenance expenses. Tax Consequences at Disposition: This type of usage, which is still primarily as a second residence, provides the ability to exclude a portion of capital gain taxes to the extent the property owner qualifies under Section 121. A 1031 Exchange tax deferral is not available for this type of usage as the property will not meet required criteria.  VACATION HOME RENTED MORE THAN 15 DAYS A YEAR Tax Consequences during Ownership: If a vacation home is rented more than 15 days during the year, the rental income must be included as rental income and added to gross income. The expenses associated with renting the vacation home can be deducted. The expenses associated with the vacation home must be allocated between personal and rental use and the amount of rental expenses that may be deducted will depend on the number of days the home was rented. The rental income will be reflected on Schedule E of the property owner’s federal tax return. Tax Consequences at Disposition: This type of property may potentially qualify for a Section 1031 exchange, provided that the taxpayer and their tax advisors can establish that the ‘primary purpose’ of holding the property was for investment purposes. If the property owner has substantially more than two weeks of personal use per year, however, this may be difficult to establish (review previous discussion) #### **Converting a Vacation Home Into an Investment Property** A property owner can prepare in advance for a potential Section 1031 exchange in the future by converting a vacation home or second home into a property held for investment. There are a number of steps that can be taken to accomplish this, which may include some of the following actions: - Keeping any personal use of the property to a minimum, under 2 weeks a year, and/or below 10% of the days the property is rented. - Hiring a local property management company to make the property available for rental use. - Listing the property for rental on popular websites such as VRBO.com, Airbnb, rentals.com, homeaway.com, vacationrentals.com, etc.; and - Showing rental income on Schedule E of the property owner’s tax return and other tax treatment consistent with a rental investment property. As always, it is important to consult with your legal or tax advisor before engaging in a Section 1031 exchange. A careful review of the unique facts and circumstances of a vacation property owner’s situation should be done before the decision is made to proceed with an exchange. #### Understanding Your Options *Whether or not you plan to sell your vacation property, it is important that you understand your options and select a long-term tax deferral strategy that is most suitable for your overall objectives. We encourage you to contact the professionals at First Guardian Group as well as your personal tax and legal specialists to learn more about retaining the appreciated equity in your real estate investments while minimizing or even eliminating tax consequences. Please feel free to contact FGG1031 for more info. * *[![](https://no-cache.hubspot.com/cta/default/5468919/interactive-183027517719.png)](https://blog.fgg1031.com/hs/cta/wi/redirect?encryptedPayload=AVxigLI4xevKhDidZ08j6urOd4RIwoamb%2BVoQ001LVAls9%2FAm5jx3QUFd%2F2A2PqIOZLdxajUcWCir6icVYX2JyiI%2FQVJrA1kQzIe6E0aJRApFkm5ONL1g3jvvbbmg3DktfjMF%2Bk8t37ZSZAUQJ7wKrnhRjl5p4qyBjp4aFsydgjCjU9AWu5rZjovKhH2mxuoyLgMKe6DKVhItmxjNz4e%2BIhrQaqcZDYP2xg0sdQE62G1Dmu0&webInteractiveContentId=183027517719&portalId=5468919)* ### [Paul Getty](https://blog.fgg1031.com/blog/author/paul-getty) Paul M. Getty is one of the most experienced 1031 exchange specialists in the United States, with a career in real estate that spans over 35 years and more than $5 billion in commercial transactions across every major asset class. His work covers single-family rentals, apartments, retail, office, multifamily, and student and senior housing, giving him a practical understanding of how different property types perform across market cycles and how investors can move between them using tax-deferred exchange strategies. As President and CEO of FGG1031 | First Guardian Group, Paul advises investors through the full 1031 exchange process, from identifying qualifying replacement properties to structuring acquisitions through Delaware Statutory Trusts (DSTs) and wholly owned real estate. His guidance covers both the compliance requirements of a valid exchange and the investment decisions that determine long-term portfolio outcomes – a combination that is difficult to find in a single advisor. Paul holds a California and Texas real estate broker license and carries Series 22, 62, 63, and 82 securities licenses as a registered representative with Emerson Equity LLC, member FINRA /SIPC. He has represented buyers and sellers across complex commercial transactions, sourced and structured debt and equity, and worked alongside nationally recognized firms including Marcus Millichap, CBRE, JP Morgan, and Morgan Stanley. Before founding FGG1031, he co-founded Venture Navigation, a boutique investment banking firm whose M&A and IPO activity generated over $700 million in investor returns. Paul holds an MBA in Finance from the University of Michigan and a bachelor’s degree in chemistry from Wayne State University. He has also completed coursework in artificial intelligence at Stanford University. He is the author of four books on real estate investing and tax deferral strategy, including Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST) and Real Estate Investing in the New Era, both available on Amazon. A frequent speaker on 1031 exchanges, DST investing, and real estate tax strategy, Paul Getty is a recognized voice for investors and advisors seeking guidance on capital preservation through tax-deferred real estate investment. ## Your Comments : This is a search field with an auto-suggest feature attached. - There are no suggestions because the search field is empty. - Latest Posts - Popular Posts [Partial 1031 Exchange: How It Works, What Gets Taxed, and When It May Make Sense](https://blog.fgg1031.com/blog/partial-1031-exchange-how-it-works) [ 1031 Exchange](https://blog.fgg1031.com/blog/topic/1031-exchange) [721 UPREIT Options in DST Programs (Part 3)](https://blog.fgg1031.com/blog/721-upreit-options-in-dst-programs) [ Real Estate Investors](https://blog.fgg1031.com/blog/topic/real-estate-investors) [ DST](https://blog.fgg1031.com/blog/topic/dst) [ 721 Exchange](https://blog.fgg1031.com/blog/topic/721-exchange) [ UPREIT](https://blog.fgg1031.com/blog/topic/upreit) [ New featured](https://blog.fgg1031.com/blog/topic/new-featured) [Can a 9% Taxable Return Beat a 4.5% Tax Advantaged DST?](https://blog.fgg1031.com/blog/can-a-9-taxable-return-beat-a-4.5-tax-advantaged-dst) [ Real Estate Investors](https://blog.fgg1031.com/blog/topic/real-estate-investors) [ DST](https://blog.fgg1031.com/blog/topic/dst) [ New featured](https://blog.fgg1031.com/blog/topic/new-featured) ### Categories - 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However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal. Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect.  The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits. IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. Securities offered through registered representatives of [LightPath Capital, Inc.](http://www.lightpathcapital.com/) Member [FINRA](http://www.finra.org/) / [SIPC](https://www.sipc.org/). FGG1031, First Guardian Group, and LightPath Capital, Inc. are separate entities. Copyright 2022, All Rights Reserved, FGG1031 [![FGG_Footer_White](https://blog.fgg1031.com/hs-fs/hubfs/FirstGuardianGroup_2022/FGG_Footer_White.png?width=300&height=95&name=FGG_Footer_White.png "FGG_Footer_White")](http://fgg1031.com) 97 East Brokaw Road, Suite 350, San Jose, CA 95112 [(866) 398 1031](tel:(866)%20398%201031) [info@firstguardiangroup.com](mailto:) [![Bitmap](https://blog.fgg1031.com/hubfs/FirstGuardianGroup_2023/Bitmap.png)](https://brokercheck.finra.org/individual/summary/6470002) ## Recent Blogs - [Understanding the Difference Between Inheritance and Estate Tax August 3, 2023](https://blog.fgg1031.com/blog/understanding-the-difference-between-inheritance-and-estate-tax) - [Public or Private Real Estate? Your Investment Portfolio May Need Both July 27, 2023](https://blog.fgg1031.com/blog/public-or-private-real-estate-your-investment-portfolio-may-need-both) - [How to Use 1031 Exchange Funds to Improve Your Replacement Property July 20, 2023](https://blog.fgg1031.com/blog/how-to-use-1031-exchange-finds-to-improve-your-replacement-property) ## Useful Links - [Home](http://fgg1031.com/) - [About Us](https://fgg1031.com/about-us/) - [Blogs](https://blog.fgg1031.com/blog) - Testimonials from Past Customers - [Resource Center](https://fgg1031.com/resource-center/) - [Current Offerings](https://fgg1031.com/property-listings-directory/) FGG1031 | First Guardian Group and Emerson Equity LLC do not provide legal or tax advice. Securities offered through [Emerson Equity LLC](http://www.emersonequity.com/) Member [FINRA/SIPC](http://finra.org/) and MSRB registered. Emerson Equity LLC is unaffiliated with any entity herein. 1031 Risk Disclosure: - There is no guarantee that any strategy will be successful or achieve investment objectives; - Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments; - Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities; - Potential for foreclosure – All financed real estate investments have potential for foreclosure; ·Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments; - Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions; - Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits No offer to buy or sell securities is being made. Such offers may only be made to qualified accredited investors via private placement memorandum. Risks detailed in a private placement memorandum should be carefully reviewed, understood and considered before making such an investment. Prospective strategies and products used in any tax advantaged investment planning should be reviewed independently with your tax and legal advisors. Changes to the tax code and other regulatory revisions could have a negative impact upon strategies developed and recommendations made. Past performance and/or forward looking statements are never an assurance of future results. Many of the investments offered will be only available to those investors meeting the definition of an Accredited Investor under SEC Rule 501(A) and offered as Regulation D private placement securities via a Private Placement Memorandum (“PPM”). Prospective investors must receive, read and understand all of the risks associated with buying private placement securities. Investments are not guaranteed or [FDIC](http://fdic.org/) insured and risks may include but are not limited to illiquidity, no guarantee of income or guarantee that all tax advantages or objectives will be met and complete loss of principal investment could occur. **Risk Disclosure:** Alternative investment products, including real estate investments, notes & debentures, hedge funds and private equity, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. There may be restrictions on transferring interests in any alternative investment. Alternative investment products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Additionally, alternative investments often entail commodity trading, which involves substantial risk of loss. NO OFFER OR SOLICITATION: The contents of this website: (i) do not constitute an offer of securities or a solicitation of an offer to buy of securities, and (ii) may not be relied upon in making an investment decision related to any investment offering by FGG1031 | First Guardian Group, Emerson Equity LLC, or any affiliate, or partner thereof. FGG1031 | First Guardian Group does not warrant the accuracy or completeness of the information contained herein. Copyright 2026, All Rights Reserved, FGG1031