Can You 1031 Exchange an Airbnb? Yes, If It Is a Business and Not a Getaway

Short term rentals have become a serious investment category. Owners buy cabins, condos and beach houses specifically to rent by the night through platforms such as Airbnb and Vrbo, and some produce more income than long term leases on the same property.

So can they be exchanged under Section 1031? Generally yes. But short term rentals sit closer than most property types to the line between investment property and a personal holiday home, and that line decides whether the exchange works.

Does a short term rental qualify as investment property?

A property held primarily to earn rental income qualifies as property held for investment or for productive use in a business. The rental model, nightly rather than annual, does not change that.

What matters is how the property is actually used. A cabin that is booked most of the year by paying guests and only occasionally used by the owner looks like investment property. A cabin used by the owner's family all summer and rented for a few weekends looks like a holiday home with some rental income.

What is the safe harbour test?

The IRS set out a safe harbour for dwelling units in Revenue Procedure 2008-16. It is most often discussed for vacation homes, but it applies equally to short term rentals.

For the property you are selling, in each of the two twelve month periods before the exchange:

• ›It must be rented at fair market rent for at least 14 days
• ›Your personal use must not exceed the greater of 14 days or 10 percent of the days it was rented

The same test applies to a replacement dwelling for the two twelve month periods after the exchange.

Busy short term rentals usually clear the rental threshold easily. The personal use limit is where owners get caught.

What counts as personal use?

More than people assume.

• ›Days you or your family stay there, even if you did some work while there
• ›Days rented to family members below market rent
• ›Days used by anyone under an arrangement where you use their property in return
• ›Days donated or given free to friends

Days spent substantially on repairs and maintenance generally do not count, but keep records showing the work performed.

If the property rented 200 nights, the personal use allowance is 20 days. If it rented 100 nights, it is 14 days.

Are there issues specific to short term rentals?

A few worth knowing.

Services provided. Short term rentals that provide substantial hotel like services may be treated as a business rather than a passive rental for some tax purposes. That generally does not stop the real estate from qualifying for a 1031, since property used in a business also qualifies, but it can affect other parts of your tax picture.

Furnishings. Since 2018, only real property can be exchanged. Furniture, linens, kitchen equipment and other personal property included in a sale are not like kind. Their value should be allocated separately in the sale, and gain on them may be taxable.

Local rules. Many cities and counties restrict or ban short term rentals. A property that can no longer legally be rented short term may still be investment property, but the replacement strategy may need to change.

Records. Platform booking histories are excellent evidence. Keep annual reports of nights booked, nightly rates, and a calendar showing any personal use.

Can you exchange a long term rental into a short term rental?

Yes. Real property held for investment is like kind to other real property held for investment, whether rented annually or nightly. Many owners exchange from an apartment or single family rental into a short term rental in a destination market, or the reverse.

The replacement must then be operated as a genuine rental. Buying a beach house through an exchange and using it mostly for family holidays risks the whole exchange.

What if you want to use the property personally later?

Plan it. Rent it fully for at least two years after the exchange, keeping personal use within the limits, and only then increase personal use if you wish. Converting a replacement property to personal use quickly suggests it was never acquired for investment.

How do you choose a short term rental as replacement property?

Treat it as an operating business, because that is what it is. Before identifying one inside a 45 day window, check local regulations and permit requirements, realistic occupancy and nightly rates from comparable listings, cleaning and management costs, and seasonality.

Short term rental income is far more volatile than a long lease. A property that performs well in a strong tourism year can struggle when travel slows or a new regulation limits listings. Many owners who want income without that operational intensity end up choosing a long term rental, a net lease property, or a Delaware Statutory Trust interest in professionally managed property instead.

There is no single correct answer. What matters is choosing the replacement on its merits as an investment, not because it is a place you would like to stay.

What to do first

Pull the booking history for the last two years and count rental nights at market rate and every personal use night. If you are within the safe harbour, keep that documentation with your exchange records. If you are not, consider whether to meet the test before selling, and discuss the position with your CPA before listing.

Nothing here is tax, legal or investment advice. Rules depend on your facts. Confirm your position with your CPA before you act.