Deferring Taxes & Vacation Homes

Those are two great things. Does the spring air have you thinking about planning your next vacation? You may be ready to sell an investment property to purchase a vacation home with the profits. You may defer taxes on that profit using a 1031 Exchange to buy a vacation home, if certain requirements are met. That may mean more buying power for you.

You must own the new vacation home for two continuous years. That part is easy since you’ll have just bought it. You have to rent it out each year for a minimum of 14 days. Short term rentals are all the trend now such as Air BNB, VRBO and HomeAway. You can rent it out longer, too. The hard part is that you have to restrict personal use of the home to a maximum of 14 days in each of those two years, or 10% of the number of days you rented it out. So if you booked renters for 180 days of the year, you can vacation there 18 days.

Mortgages for vacation homes are slightly different from primary residences, but you can usually put as little as 10% down, depending on loan size. If you are considering a 1031 Exchange, start planning now, get pre-approved for the mortgage and have all your ducks in a row. Be sure to also consult your tax advisor because nowadays, tax rules change more than the weather. When done within the requirements, you could enjoy large tax savings.

Have you done a 1031 exchange? Please share your thoughts and advice for our readers.

Dee Pajak is a Mortgage Loan Officer at Fairway Independent Mortgage on Bainbridge Island. As an experienced investor, flipper, landlord, DIY’er and industry speaker, she loves to help people grow their wealth. 678-799-4167