Two Great Things: Deferring Taxes and Vacation Homes

Does the end of summer have you thinking about planning next year’s vacation? You may be ready to sell an investment property to purchase a vacation home with the profits. If certain requirements are met, you may defer taxes on that profit using a 1031 Exchange to buy a vacation home. 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 AirBNB, 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. For example, 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. When done within the requirements, you could enjoy large tax savings.


Denise Pajak (NMLS#6191) is vice president and mortgage banker at the Private Bank of Decatur. She can be reached at 678.799.4167


by Denise Pajak