1031 Exchange on your Lake of the Ozarks Condominium

One main difference in the tax treatment of your vacation condo is that on the surface, you cannot use a 1031 Starker Exchange to defer the capital gains if you used this property strictly as a vacation condo for your own personal use.  One solution to this is to convert the condo to a rental property. 

Conversion of a vacation condo to a rental property is a nontaxable event.  Once a property owner starts renting the condominium, the treatment of the property for income tax reporting changes as well.  Depreciation, expenses, rents received, will all be reported on your tax return.  It is then eligible for a like kind exchange of property.  Like kind meaning anything that is not your primary residence, so it could be exchanged for raw land, investment property, even an interest in a TIC Tenants-in-Common investment.   

There are so set in stone rules as to how long you must rent the condo before it is considered converted to a rental by the IRS.  One year is often cited as probably long enough, but this is a decision for you and your tax advisor to consider.  Once the property is converted to rental, is the owner prevented from ever using the property for personal use?  The answer is no, they are not prevented from using the property, but they are limited.  The easy and quick answer is that owners can use the property for 14 days without altering its designation as a personal use property, or 10% of the number of days during the year for which the unit is rented at a fair rental.  The days you spend working on the property, or performing maintenance on the property do not count as personal use days. 

The other solution might be to convert the condo to your primary residence, and this involves occupying the property for a minimum of two years.  At this point, you can use the $500,000 exemption for married individuals to avoid capital gains tax.   

If you have any questions about 1031 exchanges or buying or selling Lake of the Ozarks real estate, you can always contact John Garrett at 573-302-2320 or e-mail me for a fast response. 

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