Can Vacation Homes and Second Homes Qualify for a 1031 Exchange?
One of the most common questions real estate investors ask is whether a vacation property or second home can be exchanged under Section 1031 of the Internal Revenue Code. At first glance, these types of properties look personal in nature, and the IRS has historically been cautious about allowing exchanges that involve any personal use.
Over time, however, a mix of court decisions, IRS rulings, and formal guidance has shaped the answer. The short version: under certain circumstances, vacation properties and second homes can qualify—if they are treated as investment property and not primarily for personal enjoyment.
A Brief History of Conflicting Guidance
For decades, investors received mixed signals about whether vacation homes could qualify for tax-deferred exchanges.
Private Letter Ruling (1981): The IRS suggested a vacation property might qualify if it was used for both investment and personal enjoyment. However, this was issued long before modern regulations and therefore left lingering uncertainty.
Deferred Exchange Regulations (1991): Treasury regulations clarified that property must be held for investment or business purposes, seemingly excluding second homes unless rented or otherwise treated as investments.
Tax Court Memo 2007-134: In 2007, the Tax Court denied an exchange where the investor’s true intent was personal use. This decision underscored that intent at the time of sale is what matters—not just how the property was originally acquired.
The result: investors needed clearer rules.
The Turning Point: Revenue Procedure 2008-16
In response to pressure from both the courts and the Treasury Inspector General (who criticized the lack of oversight in vacation home exchanges), the IRS released Revenue Procedure 2008-16.
This guidance, effective March 10, 2008, provides a safe harbor—a set of conditions under which the IRS will not challenge whether a vacation property qualifies for exchange treatment.
The Safe Harbor Rules
For Relinquished Vacation or Second Homes
A vacation property being sold in a 1031 Exchange may qualify if:
The property was owned for at least 24 months before the exchange.
It was rented out at fair market rent for at least 14 days per year during each of those two years.
Personal use was limited to the greater of 14 days or 10% of the rental days during each year.
For Replacement Vacation or Second Homes
A newly acquired vacation or second home as replacement property may qualify if:
The property is held for at least 24 months after the exchange.
It is rented out at fair market rent for 14 days or more in each of those years.
Personal use is limited under the same 14-day or 10% rule.
What Counts as “Personal Use”?
The IRS defines personal use broadly:
Days used by you or your family count as personal use—even if no rent is paid.
Allowing others to use the property rent-free (or at below-market rent) also counts as personal use.
However, if a family member pays fair market rent and uses the property as their primary residence, those days are considered rental use, not personal use.
Beyond the Safe Harbor
It’s important to note that Revenue Procedure 2008-16 doesn’t create the only path to qualify. A vacation home or second home that falls outside these guidelines may still work in a 1031 Exchange—but success depends heavily on demonstrating that the property was genuinely held for investment or business purposes.
In these cases, the burden of proof is higher, and documentation such as rental agreements, advertising records, and tax reporting can strengthen your position.
The IRS has made it clear: vacation homes and second homes can qualify for 1031 Exchanges, but only when they are treated as genuine investment properties. Proactive planning—limiting personal use, ensuring fair-market rentals, and keeping solid records—can make the difference between a successful exchange and a costly disqualification.
As always, each situation should be carefully reviewed with qualified tax and legal advisors before proceeding.
