Can I Use a 1031 Exchange to Buy an Airbnb Property?

The rise of platforms like Airbnb has transformed the short-term rental market, creating lucrative opportunities for real estate investors. Many investors might wonder if they can leverage a 1031 exchange to defer capital gains taxes by selling one investment property and purchasing an Airbnb property. The answer is yes but with important caveats. Let’s break down the key factors to consider when using a 1031 exchange for an Airbnb investment.

The “Productive Use” Test for 1031 Exchanges

For a property to qualify for a 1031 exchange, the IRS requires it to be held for investment purposes or “productive use” in a trade or business. This means the property needs to be generating income through renting or leasing. The good news is that Airbnb properties can generally meet this requirement, but there are specific guidelines.

Airbnb and Rental Periods

The IRS provides a safe harbor for qualifying an Airbnb property under the 1031 exchange rules. If the property is rented out for at least 14 days in each of the two 12-month periods following the exchange, it typically qualifies for tax deferral benefits.

Airbnb and Personal Use: The 14-Day Rule

One crucial factor that distinguishes Airbnb from traditional long-term rentals is the possibility of personal use. The IRS imposes a 14-day rule, stating that personal use of the property cannot exceed 14 days or 10% of the total days it’s rented out each year, whichever is greater. Investors need to be mindful of this limitation as excessive personal use could jeopardize the 1031 exchange eligibility.

Do’s and Don’ts of Using a 1031 Exchange for an Airbnb

Do:

• Keep meticulous records of all rental days.
• Limit your personal use of the Airbnb property.
• Seek professional guidance from a qualified intermediary and tax advisor.

Don’t

• Assume that any short-term rental automatically qualifies for a 1031 exchange.
• Treat the property primarily as a vacation home.
• Ignore the specific IRS guidelines governing 1031 exchanges.

Getting Help

Investing in an Airbnb property through a 1031 exchange can be a smart strategic move, but understanding the potential complexities is crucial. Before diving in, contact the experts at WealthBuilder 1031. We can help you analyze your unique situation, ensure compliance with IRS rules, and determine if a 1031 exchange for an Airbnb aligns with your investment goals. Reach out for a free consultation at 888-508-1901.