In my last three blogs of this four part series, we went over the Benefits of a 1031 Exchange - Part I, Different Types of 1031 Exchanges - Part II, and The Middleman to Complete a Successful Exchange - Part III

In this last segment, I would like to elaborate on a 1031 Exchange question I’m asked often, “Can I complete a 1031 Exchange with a vacation home or second home?”

And the short answer is yes.

Here’s what you need to know about exchanging mixed-use vacation home.

In 1981, the IRS issued a Private Letter Ruling (PLR) stating that you could 1031 Exchange out of a vacation rental and into another investment property if it was held as an investment as well as personal enjoyment. 

In 1991, the Department of Treasury issued the Deferred Exchange Regulations that went against the IRS's PLR. It stated that an Exchange must be held for investment only and not as a second home or vacation rental with the ability to use it for personal use. 

During this time, it was extremely confusing determining if a vacation rental or second home would qualify for a 1031 Exchange. 

Finally, in 2008, the IRS issued a Revenue Procedure clarifying the guidelines for qualifying a vacation rental or second home for a successful 1031 Exchange.

A Vacation Home in Waikiki

Many people dream of owning a vacation home in Hawaii.  My clients, Don and Dorothy Hobbs did just that - 27 years ago.  Don retired from his job with Pacific Bell in Seattle back in 1986 when he turned 60 and they came to Hawaii to purchase a condo in Waikiki.  Every year since then they have come for 6 months during the winter months and enjoyed staying in their small but comfortable 1-bdrm unit in Waikiki in a building called 444 Nahua.

Enjoying Retired Life

They have truly enjoyed living here on the island.  In the early years they were really active, playing golf, scuba diving and enjoying all that Hawaii has to offer.  In the last few years they have slowed down a bit and don't do all those activities as often as they used to but they still enjoy their regular walk along the Ala Wai Canal and cooking gourmet meals in their unit.