Qualifying property:
Does my property qualify for exchange?
Real property held for productive use in a business or trade, or for investment, qualifies for exchange (this is called the qualified use requirement). Your primary residence does not qualify and neither does property held primarily for sale and accounted for as inventory. So, if you purchased a property and are planning to flip it, the property does not meet the qualified use requirement and the transaction will not qualify for tax deferral under 1031.
However, an investment property you have owned for longer than the two-year period immediately preceding the sale will.
What about personal residences?
Typically, a taxpayer’s primary residence does not qualify for 1031 exchange treatment. There are, however, various exceptions to this general rule.
What about second homes and vacation homes?
Generally, a taxpayer’s second home or vacation home does not qualify for 1031 exchange treatment since “personal use” property does not meet the held for investment or held for use in a productive trade or business requirement. Also, the taxpayer will not be eligible for the personal residence exclusion under IRS Code Section 121 as noted above.
A property is generally considered to be a second home if the taxpayer uses the property for personal purposes for a number of days which exceeds the greater of 14 days or 10% of the number of days during the year for which the property is rented at a fair market value.