Vacation Homes: Investment or Personal Use?

Vacation homes are often a blend of both personal enjoyment and investment. Maybe you rent your cabin on Airbnb for most of the year and visit a couple times in the summer. Or maybe it’s just a family retreat.

 

The IRS has issued specific rules to clarify when a vacation property is considered “investment use” and therefore eligible for a 1031 exchange.

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IRS Safe Harbor Guidelines (Rev. Proc. 2008-16)

In 2008, the IRS issued Revenue Procedure 2008-16, which outlines the safe harbor rules for using vacation homes in 1031 exchanges.

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To Qualify Under Safe Harbor, You Must Meet These Requirements:

For the Relinquished Property (the one you're selling):

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• Owned the property for at least 24 months immediately before the exchange.

• In each of those two 12-month periods:

  • Rented the property at fair market value to another person for at least 14 days, AND

  • Your personal use was no more than 14 days or 10% of the days it was rented, whichever is greater.

 

For the Replacement Property (the one you're buying):

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• You must intend to follow the same pattern for the next two years after the exchange:

  • Rent it out for at least 14 days per year, and

  • Keep your personal use under 14 days or 10% of rental days.

 

Tip: "Personal use" includes use by the owner, family members, or anyone paying below-market rent.

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What Counts as “Investment Use”?

 

Besides formal rentals, investment use can include:

• Holding property for appreciation

• Leasing it on a long-term or short-term basis

• Using a property manager or rental platform to generate income

 

But you need to prove your intent. Documentation matters:

• Rental income records

• Guest agreements (e.g., Airbnb, VRBO)

• Tax filings (like Schedule E)

• Marketing listings

 

What Doesn’t Qualify?

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Vacation homes used primarily for personal enjoyment without consistent rental activity do not qualify. For example:

• A beach house you only visit with your family

• A cabin with no rental history or documentation

• A second home with irregular or below-market rentals to friends

 

You could still sell these—but you’ll pay capital gains tax.

 

A Real-Life Example

 

Scenario:

 

You own a ski condo in Colorado, bought in 2019. You:

• Rented it for 80 days/year in 2023 and 2024 via Airbnb

• Personally used it for 10 days/year for family vacations

• Have documented rental income and paid lodging taxes

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In 2025, you sell the condo and use the proceeds to buy a lake house, which you plan to rent and use similarly.

This would likely qualify under the safe harbor provisions—making it eligible for a 1031 exchange.

 

What If You Don’t Meet the Safe Harbor?

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You might still qualify, but the IRS will scrutinize your case more closely. They’ll look at:

• Your intent when you acquired and held the property

• The actual usage history (rental vs. personal)

• The marketing and income generated

• Your financial and tax records

 

You’d need strong documentation and possibly legal/tax support to defend your exchange.