I Rent Out Part of My House as an Airbnb… Would It Qualify for a 1031 Exchange?

In today’s sharing economy, many homeowners are dipping their toes into the short-term rental market through platforms like Airbnb. But what happens when you want to sell? Can you use a 1031 exchange if you’ve been renting out part of your primary residence? Let’s break down if an Airbnb 1031 exchange is possible.

The Short Answer: It’s Complicated

Unfortunately, there’s no simple yes or no. The key factor is how the property is used and reported on your taxes, especially when considering something like an Airbnb 1031 exchange.

The Primary Residence Problem

If the property is your primary residence, you face an uphill battle. 1031 exchanges are designed for investment properties, not personal residences. However, there might be a silver lining if you’ve been treating part of your home as a separate rental unit, possibly allowing for an Airbnb 1031 exchange.

The Mixed-Use Dilemma

When you use a property for both personal and rental purposes, it becomes a mixed-use property. The IRS looks at the percentage of the property used for each purpose when considering an Airbnb 1031 exchange.

Potential Scenarios:

1. Separate Unit: If you’ve been renting out a clearly defined separate unit (like a basement apartment) and treating it as a distinct rental property on your taxes, you might be able to do a partial 1031 exchange on that portion. This could be considered an Airbnb 1031 exchange scenario.
2. Occasional Rentals: If you’ve just been renting out a spare room occasionally, it’s unlikely to qualify for a 1031 exchange.
3. Majority Rental Use: If more than 50% of the property has been consistently used for rental purposes, you might have a case for a 1031 exchange, but it would require careful documentation and expert guidance, particularly in an Airbnb 1031 exchange situation.

Documentation is Key

To even consider a 1031 exchange in this scenario, you’ll need meticulous records showing:

• The exact percentage of the property used for rental purposes
• Consistent treatment of the rental portion as an investment property on your taxes
• Clear separation between personal and rental use, which is crucial for an Airbnb 1031 exchange.

The Bottom Line

While it’s not impossible to use a 1031 exchange with a partially rented primary residence, it’s a complex situation that requires expert navigation. Your best bet? Consult with a qualified intermediary and tax professional to make sure your Airbnb 1031 exchange is compliant before making any decisions.

At WealthBuilder 1031, we specialize in helping investors navigate tricky 1031 exchange scenarios. If you’re considering selling a mixed-use property and want to explore your options, give us a call at 888-508-1901. We’ll help you understand your possibilities and potential pitfalls.