I have a vacation property at Lake Tahoe that I’ve owned for several years. My kids have grown and aren’t interested in going there for vacation. Also, I’ve been too busy with my business to get up there much over the past few years. So I think that it’s time to sell it, but I have not placed it on the market yet. I think it will sell for about $800,000. My tax basis is $100,000, so I’m looking at about $700,000 of gain, which means approximately $105,000 of federal taxes and another $65,000 of California state taxes. Can I exchange the home under Section 1031 to defer the $170,000 in taxes?
A property must be held “for investment or in a trade or business” to be eligible for gain deferral under Section 1031. “Investment” means primarily for appreciation and not for personal use. Therefore, the Lake Tahoe property will only qualify if you hold it primarily for appreciation.