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If you’re planning to sell a vacation home you own in a resort area, you may make out like a bandit, but you’ll have to pay a criminally high tax bill.
Turn the vacation home into a rental property. Then you can swap it for a like kind property without paying any current tax. The appreciation in value is tax-free until you sell the home. The Tax Cuts and Jobs Act eliminated the like-kind exchange break for property other than real estate. But you can still swap a vacation home under the TCJA rules. If you’ve owned and used a home as your principal residence for two out of the last five years, you can exclude the tax on the first $250,000 of gain. However, there’s no comparable tax break in the law for sales of second homes, including vacation homes. You can postpone tax on your home sale indefinitely by holding out the vacation for rental to the general public. If you own investment or business property, you can swap the property for another “like-kind” property under Section 1031 of the tax code. As long as you meet the technical requirements, the exchange is tax-free except to the extent you receive any “boot” in the deal. Of course, the Section 1031 rules don’t apply to a personal residence, because it’s not investment or business property. The IRS could claim that the vacation home is personal property. Way back in 2008 the IRS said that a “dwelling unit”—real estate improved with a house, apartment, condominium or similar improvement that provides basic living accommodations, including sleeping space, bathroom and cooking facilities—qualifies as property held for productive business or investment use for Section 1031 purposes, even if it’s occasionally used for personal purposes.
Accordingly, minimize personal use of the vacation home you’re going to swap. The home will continue to be treated as your personal property for tax purposes if your personal use exceeds the greater of 14 days or 10% of the time it is rented out.[/vc_column_text][us_image image=”3803″][/vc_column][/vc_row]
