When Is a Vacation Rental Considered Investment Property?

The IRS lets you use a 1031 exchange for investment or business properties. That means your vacation rental has to look more like a business than a personal retreat.

Ask yourself:

•  Do you rent it out consistently?
•  Is it available to the public for most of the year?
•  Do you use it for personal vacations less than two weeks a year?

8If yes, it might qualify. But if you spend entire summers there, the IRS might call it personal use - which won’t qualify.

If your vacation home is barely used by you and mostly rented, the IRS expects two key things before it qualifies:

Rental period: At least 14 days per year.

Limited personal use: No more than 14 days or 10% of the days it's rented.

Follow that for two years, and your vacation rental can be treated like a true investment property. Only then can you safely swap it under 1031 exchange rules.

Once your rental qualifies, you can explore 1031 exchange California property owners use to grow wealth - swapping into rentals, commercial space, or even land across states, you can exchange it for:

•  A long-term rental property
•  Commercial space
•  Another vacation rental (with limited personal use)
•  Land, apartments, or other real estate

It doesn’t have to be in California, either. You can sell your cabin in Tahoe and buy a condo in Florida - just stick to the 45-day identification and 180-day closing windows.

Some people try to “exchange into” a property, then live in it down the line. That’s possible - but risky if done too soon. You may need to rent the new property out for two years first.

The IRS watches this closely. If you move in too early, it could cancel the exchange and trigger capital gains tax. Always talk to a tax expert before trying this move.

When you exchange properties, depreciation recapture might still apply. And if you take any cash or lower your loan balance, the IRS sees that as boot - which can be taxed. So even if the swap goes through, parts of your gain may be taxable. This is where paperwork and timing matter most.

Yes, you can complete 1031 exchange California investors often rely on—but only if the property truly qualifies as an investment. The rules aren’t impossible, but they’re strict. Stick to the timelines, limit your personal use, and document everything. Then, when the time comes to move on from one property, you might keep your gains working for you—tax-deferred and rolling into your next investment.

 ALT Financial Network Inc. 1761 E Garry Ave #200, Santa Ana, CA 92705, United States, +1 714-751-6666