From:  S.
Date:  22 Mar 2009
Subject:  1031 exchange on vacation home

I am a resident of California. My husband and I own two beach condos in Puerto Rico, a U.S. territory. The first condo was always used as a vacation home and never rented. We have claimed the second home as a second residence to deduct the mortgage interest. It was never rented, either.

We are thinking of selling the first condo. Taxes will be withheld for Puerto Rico capital gains tax.

Can we make a Section 1031 exchange for another property located in California?

Thanks for your advice.

Regards,
S.

Answer

Date:  6 Apr 2009

Hello S.,

No. Vacation homes generally don’t qualify for Section 1031 exchanges.

As a side note, property outside the United States is not like-kind to property inside the United States. Although Puerto Rico is not part of the United States, the IRS privately ruled that real property located in the Virgin Islands was like kind to property located in the United States. (Letter Ruling 200040017.)

Good luck!
Mike Gray

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