– Crystal Vagnier – Select Group – Writer/Editor
If you’re thinking of purchasing a vacation home (or a second home), it’s important to understand the beneficial tax laws that’s available for your benefit. Since your vacation home would be considered an investment and not a primary residence, there are a variety of options to consider. Under Section 1031 of the Internal Revenue Code, otherwise known as a 1031 Exchange, a property that was used as an investment prior to a sale is subject to a capital gains tax deferment by a property exchange. Here are some things to consider:
When your home is used by yourself and others. As per Investopedia, when you use it for 14 days or less and have it rented for 15 days or more, the rental is considered a business. All rental income must be reported to the IRS.
When your home is used only for other’s vacations. When the property is only used by someone else, it will qualify for a tax deferral upon selling.
When your home is used only for yourself. When your vacation home is not rented by others and only used by yourself, the capital gains will not be deferred using a 1031 Exchange.
As a reminder, the 1031 Exchange timeframes begin at the close of escrow. To allow more time to find a replacement property, starting your search in advance or delaying the escrow closing can provide you a safe cushion.
If you have any questions about the process of a 1031 Exchange, please contact me anytime.