1031 Exchanges of Vacation Homes

Vacation homes have been a hot button issue for the IRS when it comes to 1031 exchanges. They have challenged the exchange of second homes, cabins, ski chalets, and the like. Their position is this: if the taxpayer uses the property primarily for personal use, it doesn’t matter that the taxpayer wanted it to appreciate in value and was hoping it was a good investment. What matters is the taxpayer’s use of the property. In short, you can’t exchange a cabin for another cabin if both properties are used for personal use.

Moore v. Commissioner

The seminal case in this area is Moore v. Commissioner. In 2008 the IRS went out of their way to create a safe harbor because a lot of taxpayers like to own vacation condos that are put into rental pools managed by companies that bring in periodic tenants. But the taxpayer may also want to use their condo for a few weeks a year.

So the IRS decided to look at the properties you sell in a 1031 and analyze the two years prior to sale to determine if it was used too much for personal property. They test each of those years to see if the taxpayer used it more than 14 days a year or more than 10% of the time it was rented. If you stay within the confines of this safe harbor, you can still do a 1031 exchange provided it was in a rental pool and your use didn’t exceed these thresholds.

Exchanging into a Vacation Home

The same analysis also applies if you’re exchanging into a property that is going to be put into a rental pool. On the replacement side, if you’re buying a condo you want to make sure that your personal use does not exceed 14 days a year, or 10% of the time it was rented.

Here’s a tip - don’t be cute with the IRS. If you’re going to go on vacation for a month and a half, rent a different condo than the one you own. Then you can avoid this common trap when it comes to 1031 exchanges of vacation homes.

• Start Your Exchange: If you have questions about 1031 exchanges of vacation homes, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

The 1031 Strike Zone - Does My Property Qualify?

Whether or not your property qualifies for a 1031 exchange is determined by whether or not it fits in the IRS’s strike zone for a 1031. Inside this strike zone are properties held for investment or business purposes. We have talked at length about the various types of property that fall within this strike zone, but what exists outside the strike zone for 1031 exchanges?

Outside the Strike Zone

Outside the 1031 strike zone are 2 major categories:

1. Properties used primarily for personal use like a lake cabin or a ski chalet, or the car you use to drive to the grocery store. You are not holding these for investment or business purposes. They are for personal use.

2. Inventory or property you hold primarily for resale. Let’s say a taxpayer buys a big tract of land and chops it up into parcels that they then sell to the public to build homes on. Is that taxpayer holding that property for investment or business purposes or are they holding it for inventory for sale to the public? A surly IRS agent would say the latter and deny a 1031 exchange.

So condo converters, developers, and even house rehabbers or flippers don’t fit neatly into the 1031 strike zone. If you fall into one of these categories and are considering a 1031 exchange, contact a qualified intermediary to discuss your options.

• Start Your Exchange: If you have questions about whether or not your Minnesota property qualifies for a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Post-Exchange Refinancing

Many people have questions about refinancing their replacement property after their exchange is over. Here we will answer some FAQs about refinancing after a 1031 exchange and offer some tips and best practices.

Refinancing after a 1031 Exchange

First off, refinancing one’s old relinquished property in anticipation of an exchange should be differentiated from post-exchange refinancing, done in a separate transaction after the exchange is completed. I think that the stronger more defensible position is for a post-exchange refinance (done in a separate transaction after the last replacement property has been received by the taxpayer to complete their exchange).  I do not endorse refinancing one’s relinquished property, especially if a sale/exchange of the property is looming or anticipated to occur in the near future.

There is precious little authority available on this topic. However, these topics are discussed in section 4:14 of Tax Free Exchanges Under §1031, which states that: 

“current case law favors the position that the taxpayer can obtain tax-free cash from an increase in debt on the taxpayer’s property prior to or after closing of an exchange.”

Additionally, the American Bar Association Section of Taxation has prepared Comments Concerning Open Issues in Section 1031 Like-Kind Exchanges.  On point is Answer 2b set forth below:

[The italicized text below represents what I think is the current thinking among knowledgeable tax commentators.]

A-2b. POST-EXCHANGE REFINANCINGS.

Post-exchange refinancing should be of less concern from a tax perspective than pre-exchange refinancing. Here the integration of the refinancing with the acquisition of replacement property should not matter. Even where a new loan is obtained at the time or immediately following a taxpayer's acquisition of replacement property in an exchange, receipt of cash by the taxpayer should not be treated as boot.

There is, however, virtually no authority addressing this issue. The key to the distinction between pre- and post-exchange refinancing is that the taxpayer will remain responsible for repaying a post-exchange replacement property refinancing following completion of the exchange whereas the taxpayer by definition will be relieved from the liability for a pre-exchange relinquished property refinancing upon transfer of the relinquished property.

A fundamental reason why borrowing money does not create income is that the money has to be repaid and therefore does not constitute a net increase in wealth. This is clearly the case in a post-exchange refinancing and there is no analytic reason to characterize such financings as being in lieu of fictitious payments by the seller of replacement property. Thus, we encourage the publication of a revenue ruling which indicates that money received in a post-exchange refinancing will not constitute "boot" in an exchange.

• Start Your 1031 Exchange: If you have questions about post exchange refinancing, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2022Copyright Jeffrey R. Peterson All Rights Reserved

What is a Qualified Intermediary?

In this 1031 FAQ video, Jeff Peterson talks about the functions of a qualified intermediary in a 1031 exchange. Watch more 1031 educational videos here.

• Start Your 1031 Exchange: If you have questions about qualified intermediaries in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Common Questions Closers Have About 1031 Exchanges

In this 1031 FAQ video, Jeff Peterson answers some common questions title closers have about 1031 exchanges. Watch more 1031 educational videos here.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges and closing documents, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved