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1031 Exchange for Airbnb: How to File Your Property?

Last updated on January 31st, 2024

1031 Exchange for Airbnb: How to File Your Property?

1031 exchange for airbnb

1031 Exchange for Airbnb: How to File Your Property?

Sell your short-term rental property now, and worry about capital gains taxes later with 1031 Exchange for Airbnb!

Want to sell your beautiful short-term rental but capital gains taxes get in the way? Then fear no more! With a 1031 Exchange for Airbnb, you can sell your property and buy a new one while deferring those taxes legally. In this article, we’ll cover

  • The definition of 1031 Exchange
  • Types of properties qualified for the Exchange
  • Airbnb requirements for 1031 Exchange
  • Filing of 1031 Exchange

What is 1031 Exchange?

A 1031 Exchange is a special IRS rule that allows property owners to sell their houses and buy another while deferring capital gains tax. This allows investors to reinvest the proceeds into another qualifying property. The ability to reinvest without any immediate tax liability, allows Airbnb investors to diversify their real estate portfolio and create wealth faster. 

When Can a Vacation Home Qualify for a 1031 Exchange?

A vacation home is eligible for a 1031 Exchange provided that it is traded for another vacation home. This is because all properties involved in the 1031 Exchange must be “like-kind.” The IRS defines this as having the same character or nature, although they differ in grade or quality and whether either of the properties is improved or unimproved. See below the 1031 Exchange summary of qualifications:

  • “Like-kind” also means that both properties involved should be used as income-generating assets or held as investments. In terms of property type, a condominium unit is also considered like-kind to another similar unit.
  • A real estate property in the US is only like-kind to another property in the US
  • A foreign real estate property is like-kind to another real estate outside the US

Does Airbnb Qualify for 1031 Exchange?

Airbnb qualifies for 1031 Exchange. The reasoning behind this is the income-generating nature of short-term rentals. This already satisfies the requirement of ownership of business and income properties.  However, there are other prerequisites for 1031 Exchange for Airbnb laid out in Rev Proc 2008 16:

  • Ownership of the property for at least 24 months before the exchange
  • The exchanger has to rent out the property for 14 days or more every year at a fair rental price. 
  • The exchanger’s personal use of the property must not exceed 14 days or 10% of the number of days the property is rented

How Do You File 1031 Exchange for Your Vacation Home to IRS?

Below are the essential steps to help you navigate the 1031 Exchange:

1. Make sure you already have a Qualified Intermediary (QI) before selling your current property. A QI is a third party that facilitates the 1031 exchange and safeguards the funds on behalf of the taxpayer. It is essential to communicate your intention to sell and communicate it to your QI beforehand. A QI can be a CPA, a lawyer, or a financial institution that has a track record of 1031 exchange. 
2. The taxpayer sells the relinquished (or the current) property to a buyer, just as they would in a regular sale. They need to decide the portion of the sale that will be reinvested in the new property. However, the proceeds of the sale are transferred to the QI’s escrow account in the meantime. 
3. The taxpayer needs to identify the replacement property within 45 days of selling the relinquished property. Before the end of the 45-day period, the taxpayer must prepare proper documentation and share it with their QI and the seller of the replacement property. 
4. After the formal identification of the replacement property, the taxpayer has to close the sale of the replacement property. Whichever is earlier, the closing has to be done within 180 days or until the due date of their tax return.  
5. Report the Exchange by filing the IRS Form 8824 with your tax return.

Harnessing Tax Advantages with 1031 Exchange for Airbnb Properties

1031 Exchange for Airbnb is among the tax benefits that investors can take advantage of. By using this special IRS rule, Airbnb owners can sell their cherished properties, and acquire new vacation homes while deferring capital gains taxes along the way. 

But remember that you will have to pay them eventually.  It’s just that the 1031 exchange allows the exchangers to reinvest the deferred payment into a replacement property. 

Have you found a replacement property? Then check its profitability with the most advanced Airbnb Calculator!

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