Is a 1031 into a short-term rental allowed?

A nightly rental is business or investment real estate, which is all the replacement test asks

Under Publication 544 both the property you give up and the property you receive must be held for investment or for productive use in a trade or business, and the two are interchangeable. Selling a long-term rental and buying a short-term rental is therefore an ordinary like-kind exchange of real estate for real estate.

What the IRS looks for is investment intent rather than the length of guest stays. The services and passive-loss questions that come with nightly rentals are handled in the short-term rental property guide.

The risk is the opposite one: a property in a place you like to visit can look like a second home. Rev. Proc. 2008-16 recites the IRS position, from Rev. Rul. 59-229 and the Moore decision, that a property used as a residence is not held for investment.

For two years after you close, your own nights are what the safe harbor counts

Section 4.02(2) of Rev. Proc. 2008-16 says the IRS will not challenge a replacement dwelling if you own it for 24 months after the exchange and, in each of the two 12-month periods, rent it at a fair rental for 14 days or more and keep personal use to the greater of 14 days or 10% of the days it is rented at a fair rental.

Personal use follows section 280A(d)(2): any day you, a co-owner or a family member uses it, or anyone pays less than fair rent. Publication 527 gives the family list as spouse, siblings, parents and grandparents, and children and grandchildren.

Missing the safe harbor is not automatic failure, but the property is then judged on its facts. If you file expecting to meet it and do not, the revenue procedure says to amend the return. The full day-count method is in the vacation home and STR guide.

Furniture bought with exchange money is boot, so price it out of the real estate

Only real property qualifies, so beds, sofas and linens bought in the deal are other property under section 1031(b). The 15% rule in Reg. section 1.1031(k)-1(g)(7) only keeps incidental personal property from spoiling the intermediary safe harbor; it does not make the furniture tax-free.

Put a separate figure on the contents in the contract and pay it with your own money, outside the exchange. That keeps the boot at zero and gives the furniture its own basis for depreciation. The detail is in furniture in a furnished rental.

Worked example: a $600,000 furnished cabin with $40,000 of contents

Hypothetical, round figures. You have $600,000 with your intermediary and a $250,000 realized gain. The cabin is listed fully furnished at $640,000, and you and the seller agree that $40,000 of that is furniture and equipment.

If the intermediary pays the full $640,000, partly with a $40,000 loan, the $40,000 of contents is non-like-kind property received and $40,000 of gain is recognized. If you pay the $40,000 for contents from your own account and the intermediary pays $600,000 for the real estate, nothing is recognized.

Then plan your own use: if the cabin is rented 150 nights in each of the first two years, you may stay up to 15 nights per year inside the safe harbor. Run your own numbers with your CPA.

Check the local rules before day 45, because the exchange cannot wait for a permit

Cities and counties license, cap or ban nightly rentals, and these rules change. A ban does not make the property non-like-kind, but it can force you into long-term renting at a different income, so read the local code and permit status before you identify it under the 45-day rule.

If you want vacation-market exposure without running the property yourself, some Delaware Statutory Trusts own hospitality or resort-area real estate; a trust interest is real property for exchange purposes under Rev. Rul. 2004-86. You would have no personal use, and the trust's fees, debt and illiquidity apply; see hotel and hospitality DSTs.